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Twenty Years After the Asian Financial Crisis

On 2nd July 1997 the Bank of Thailand allowed the baht to float, thus ending its struggle to maintain the peg with the US$ in the face of massive speculative attacks, during which the country’s foreign reserves were almost entirely exhaust. The collapse of the Thai currency was rapidly followed by similar events in Indonesia, Malaysia, the Philippines and South Korea. The dramatic falls in currency values and asset prices, together with massive flights of capital affected all of the more open East Asian economies,1 with real concern for the banking sectors in Japan and Singapore with their heavy regional exposures. Thus, what started as a series of national crises rapidly became regional in scope and a threat to the stability of the international system.  The more serious global consequences of the AFC (Asian Financial Crisis), as it became known, were averted by IMF rescue packages for Indonesia, the Philippines, South Korea and Thailand so large that the rulebook had to be rewritten.2 This funding contained the crisis and undoubtedly saved the Japanese banks from meltdown. However, this containment did nothing to lessening the impact on East Asian living conditions  and businesses    – which were  in many cases devastated – during 1997 nominal US$ GDP per capita fell 42.3% in Indonesia, 21.2% in Thailand, 19.0% in Malaysia, 18.5% in South Korea and 12.5% in the Philippines. In all cases, the resultant problems were exacerbated by the austerity that followed from the collapse of growth and substantial increases in public sector debt as, at the behest of the IMF, governments took responsivity for corporate and financial sector liabilities.

For East Asia, the   1997 crisis was a bitter experience, which left an indelible impression on the region’s people, businesses and policy makers.  The crisis was widely seen, particularly in the West, as marking the end of the East Asian Miracle and discrediting its variously state and export-led developmental forms that had threatened to challenge the neoliberal orthodoxy of the Washington Consensus.   Almost every Western commentator underlined the conclusions of the IMF that the crisis was  a product of  lax domestic regulations, corruption,  inability to adjust to changed external circumstances, and  ‘an economic system based on collusion between state, banks and business, and the restrictive markets’.3

The solution,  enshrined in the IMF conditionalities, was rapid liberalisation, particularly of restrictions on foreign ownership, and  radical reform of regulatory systems, business models and state-business relations, that would make the countries concerned more like their Western counterparts.4 Such demands reinforced the overall shock of the crisis, in particular because   they contrasted sharply with the comparatively generous and gentle treatment East Asian economies had enjoyed during previous crises, notably those of the early-1980, during which  the USA had provided additional support and financial assistance.5  Thus, in 1997  for many in East Asia there was a perception of having been badly let down, even humiliated and exploited, by the West and the international agencies. The IMF was variously  regarded as misreading, mishandling and even deepening the crisis, acting as a debt collector for the international  banks, promoting Wall Street interests by insisting on immediate liberalisation of foreign ownership regulations,  and  (with the open support of the USA) vetoing the Japanese led proposal to establish an Asian Monetary Fund to deal with the situation.

In sum, the IMF was perceived as serving Western rather than Asian interests. As a result, the Fund lost all credibility within the region and relations with the USA were seriously strained. Perhaps most significantly, the response of the IMF and the USA to the crisis, brought home to many East Asian governments that the privileged position that they had enjoyed during the Cold War had ended. Indeed, it appeared that the USA was coming to see these counties as economic rivals, rather than valued strategic partners.

The lesson was clear, under changed global circumstance, when it came to a financial crisis the East Asian economies either had to accept full strength IMF conditionalities or were on their own.  A choice constrained by the experience of surrendering economic sovereignty to the IMF engendering a determination amongst policy makers, business communities  and people in general,  never to have to experience this again. A position   coloured by some firmly held views of the causes of the 1997 crisis.6

While East Asian policy makers accepted that there were major issues of corruption, and poor regulation, particularly of finance, and shortcomings in macroeconomic management, many saw that these had been exposed and render toxic by Western driven deregulation of finance, engendering of volatile flows of short-term funds, and currency speculation.  That is, the focus on domestic causes diverted attention from the increasingly crisis prone international financial system and the shortcomings of its regulatory institutions.7 Such concern over the systemic origin of the AFC instilled in East Asian policy makers a lasting fear of another crisis. A fear reinforced by the 2001 ‘dot com’ crash, which  derailed the recovery from the AFC,  and the breaking of the GFC (Global Financial Crisis) in 2007. Thus, East Asian governments needed to put their own houses in order, and to increase their ability to deal with externally induced crisis. Imperatives that lie behind the extensive reforms and shifts in policies that since 1997 have extended well beyond the countries that were seriously affected by the AFC. Indeed, it can be argued that even for those countries that were relatively unscathed, largely due to their closed capital regimes, notably China, Taiwan and Vietnam, the AFC acted as a ‘wakeup’ call.   However, it must be stressed that for all the countries involved, the impact of  reforms, sparked by the experience of 1997 and reinforced by 2001, 2007 and subsequent events, are difficult to fully isolate from broader national, regional and global changes. With that in mind, six inter-related groups of reform-related developments are highlighted, through their importance and linkages vary across the region.

Firstly, perhaps the most striking developments have been with respect to the financial sectors in general and banking in particular, which was at the heart of the 1997 crisis. Since 1997,   banking systems have seen significant   rationalisation, reform of practice, raising of cash adequacy ratios, tighter central regulation and curtailing of   ‘casino’ activities. The latter building on the general East Asian practice of separating retail   and investment banking.  However, that is not to ignore on-going problems of bank failures in the Philippines, over-banking in Taiwan and NPL (Non-Performing Loan) issues, not least in China, the still far from  fully regulated ‘shadow’ banking sector, and continuing concerns over ‘back-sliding’ into more riskily activity as the memory of 1997 fades.  Despite these on-going issues, it is striking that since 2007 the East Asian banking systems have not only avoided any major problems, but have been praised by the BIS (Bank for International Settlements) for their general good health. The BIS drew particular attention to capital adequacy ratios and the sharp falls in the NPL levels of in Indonesia, Malaysia, the Philippines, Thailand and Singapore.8

Secondly, there was a general shift away from hard pegs to the US dollar. This saw the adoption of flexible currency management regimes that facilitated the maintenance of international competiveness, export earnings and the accumulation of reserves against any future crises. The regime changes were in many cases a painful and contested.  For the long-term pegs to the US$ were seen by many policy makers as   critical marks of economic stability and credibility.  However, from 1994 the sharp appreciation of the USA’s currency seriously damaged the competiveness of many East Asian exporters, left them with dangerously overvalued currencies, and made the hard pegs unsustainable.

Thirdly, there was a general shifts towards macro-prudential policies, which were accompanied by the reform of the status, function and mandates of central banks. The weakness of, in particular, the central banks of Indonesia, South Korea and Thailand had been fatally exposed by the AFC.  Weaknesses that reflected subordination to other parts of the state apparatus and / or politicisation of central bank operations.   The reforms and policy shifts have resulted in increased willingness of macro-economic managers to intervene rapidly and, in general, decisively, with shifts in monetary and fiscal measures in response to signs of economic instability. Particularly striking have been the responses to short-term financial flows and  the various post-2008 measures  aimed at stimulation of  economic activity and  supporting  consumption, income and employment.   In addition, despite IMF strictures, policy makers have generally adopted a cautious approach to further liberalisation, notably of capital accounts.

Fourthly, and allied to the accumulation of reserves, has been the development of regional financial safety nets, initially through a series of central bank swap arrangements.  During 2010, in direct response to the GFC, the swaps were consolidated into a multilateral regional fund – the CMIM (Chiang Mai Initiative Multilateralisation).  Developments that were accompanied by the establishment of monitoring and policy coordinating structures, notably AMRO (ASEAN+3 Macroeconomic Research Organisation) in 2011, and the institutionalisation of regular meetings of central bank and treasury / finance   ministry representatives.9 There is here the basis for an AMF (Asian Monetary Fund) as a regional alternative to the IMF or at the very least, a supplement to its activities.

Fifthly,   the high levels of unemployment, sharp increases in poverty and the collapse of domestic consumption in the wake of the 1997 crisis led to some significant policy shifts that have seen substantial increases in welfare provision, general declines in the incidence of poverty and increased levels and robustness of domestic consumption.  The latter, supported by post-2008 government measures, resulted in the East Asian recovery from the impact of the GFC (see below) being led by consumption, rather than exports.

Sixthly, there has been significant promotion of regional trade, and financial flows.10 This has involved the proliferation of agreements and institutional structures, particularly under the auspices of ASEAN and ASEAN+3 (ASEAN + China, Japan and South Korea). Further support for regionalisation (and national growth) coming from AIIB (Asian Infrastructure Investment Bank) and various funds linked to the OBOR (One Belt One Road) initiatives. There are also prospects of extensions of formal regional structures to include, Australia, India and New Zealand, with links into Central Asia through the Shanghai Cooperation and the EEC (Eurasia Economic Community) – perhaps all under an expanded RCEP (Regional Comprehensive Economic Partnership), which is emerging as an Asian-centred replacement for the Trans-Pacific Partnership.

Overall, the reforms implemented since 1997 have been aimed at reducing vulnerability to crises, while providing the wherewithal to deal with what could not be avoided. However, this did not involve anything like the full dismantling of existing business forms or relations between business and the state as advocated by the IMF and most Western commentators. Indeed, changes to corporate governance and regulation of business practices (outside of the financial sectors) have generally made limited progress, while state-business relations   have shown little substantive change. Rather, reforms were aimed at reducing the risks inherent in the existing national systems and significantly improving the effectiveness of economic management and crisis resolution.  Processes that remain on going across East Asia, as   old and new risks (see below) continue to pose significant challenges for policy makers and regulators.

The post-1997 reforms and changes in policies and approaches, combined with increased reallocation of economic activity into the region, the rise of China as a driver of regional growth and integration, and the increasing importance of intra-regional trade and financial flows, to transform the East Asian region. This is now an extremely complex and extensive regional production system, with levels of disaggregated production and movement of components and part-finished goods significantly greater than those found in the Eurozone.  Central to the development of this production system has been China, which by 2009 had become the major regional trading partner for all the other East Asian economies (including Japan).   This reflects China’s increasingly dominant position as the final stage in the regional production system for goods destined for extra-regional markets and increasingly its own rapidly growing domestic consumption.

The transformation that East Asia has undergone since 1997 is reflected in the resilience exhibited in the face of the 2007 GFC and its protracted aftermath. That is not to say that East Asia did not experience serious falls in growth and exports – indeed the contraction of exports during 2008-9 was generally greater than 1997-8.11 However, these impacts were of short duration, with growth levels returning to   pre-crisis levels (or even above) by the middle of 2010, accompanied by recovery of employment, industrial capacity utilization, domestic investment and business confidence.12 This recovery reflected both resilience, particularly of the banking and corporate systems, and the speed and extent of government responses, notably   a series of major stimulation packages. Given the high levels of integration, national actions tended to reinforce one another, most spectacularly in the case of China. The latter’s a massive  stimulation package  – perhaps as much as the equivalent of 14% of GDP – related expansion of domestic consumption, maintenance of low currency values and exploitation of new markets in the Global South playing a major role in Emergent East Asia’s rapid recovery.13

The GFC not only tested the East Asian economies, but also brought to the fore the continuing unease over the roles of the USA, IMF, Western forms of regulation, and memories of 1997.14 For the GFC had resulted from reckless and unregulated activities on the part of Western banking system, which East Asian countries had been told by the IMF to emulate in order to prevent a repeat of the 1997 crisis.

During 2008, the GFC   resulted in some serious dollar liquidity shortages – notably in Indonesia, Singapore and South Korea. However, with the experience of 1997 still very much in mind, the governments of the affected countries could not go to the IMF and survive the ensuing domestic political fallout. Instead, the   Federal Reserve was asked for assistance. While it did offer some funding, it did so on a highly selective basis – assisting Singapore and South Korea, but refusing calls from Indonesia (which was subsequently funded by the People’s Bank of China and the Bank of Japan). The Fed’s standing was  to be  further undermined by the impact of its post-2009 monetary policies on Asian financial flows, asset values, exchange rates,    bond sell-offs and dollar shortages. In 2014, Asian governments made a major protest over the Fed’s policies through the ADB (Asian Development Bank). Demands were made for the Fed to give advance notice of policy shifts, particularly with respect to interest rates. This went unheeded and again strained relations with the Fed and the USAIn contrast to the USA, China, despite the very considerable unease over its regional role, has to date implemented domestic economic policies that have been generally seen in East Asia, as both considerate and beneficial, and, as was noted above, adding to the general robustness of the region’s economies, most particularly since 2007. A view that has been reinforced by China becoming the major funder of regional institutions and infrastructure.

The increasingly close economic relationship between China and the rest of East Asian, particularly in the context of the GFC, does raise question over the extent to which the resilience of the other economies has been fully tested. Particularly given that unlike 1997, East Asia was not at the centre of the GFC. This in turn raises the question of the continuation of resilience in the context slower Chinese growth and the wide range of risks that East Asia faces. These include low commodity prices, currency volatility (related to unconventional monetary policy and increasing levels of speculation), serious infrastructure shortages that threaten to choke growth, the renewed concerns over ‘backsliding and unregulated activity in the financial sector (noted above), and   major increases in corporate and household debt.15

East Asian debt levels, which had increased rapidly in the wake of the AFC, saw further sharp rises as a direct result of policy responses to the GFC. It may well be that debt levels are now the most serious   and immediate threat to the stability of East Asian economies. The concern is not just the level of debt, but outside of China and Japan, the very large increase in the proportion of corporate debt that is foreign held. The fear is that a marked rise in American interest rates could lead to a major sell-off and spark a series of financial crisis, that the national and regional systems might be incapable of containing. Indeed, the BIS has recently warned that the  East Asian debt situation, particularly in China, when taken with monetary tightening  in the USA, the return of inflation, stalling  of consumption and corporate investments, against a background of increasing geopolitical tensions and uncertainty,  could lead to a second GFC.16 While by no means underplaying the debt issues, or indeed the other risks (noted above), it is important to stress that  unlike during the run-up to the 1997 crisis, the risks are very much on the East Asian policy makers’ radar, not least in China.

Perhaps, more problematic are the risks related to domestic political instability and regional tensions, even conflicts. Here East Asia has made very much less progress since 1997. A major domestic political event, in for example Thailand, or a serious escalation of tensions in the South China Sea or the Korean Peninsula,  could spark large-scale capital flights and a major crisis – not least given the bond market situation  noted above. Though the need to ensure stability is deeply embedded in the region’s governments, and despite the still limited regional security and disputes infrastructure, tensions have not so far been allowed to escalate to the point that they disrupt economic activity. However, we are moving into unchartered waters as it becomes   clear to all the regional players that the present situation of economic dependence on China and the USA’s domination of regional security and role as an ‘off-shore balancer’, is out of phase with geopolitical reality, and unsustainable.4   A situation that has been brought more fully into focus following the election of President Trump. The uncertainty that his inconsistent policy statements and actions have engendered in East Asia is reflected in moves by a number of the region’s governments (most significantly the Philippines) to improve relations with China and Russia, and bolster their own regional security arrangements.

In marking the 20th anniversary of the AFC, it is vital to remember the destruction, suffering and resentment that were engendered by the economic collapse and IMF imposed conditionalities. For  while these are largely forgotten in the West they remain deeply embedded in the East Asia,  particularly, but by no means exclusively,  in the five most seriously affected economies. The indelible impression left by the AFC has been critical in the continuing processes of reforming and developing the national and regional economies, and the place of East Asia in the world.  While the imperatives behind these processes have been reinforced by subsequent events, most strikingly the GFC.  The result, as has been demonstrated since 2007, is that the East Asian economies have come to exhibit remarkable resilience and increased confidence. While the varied East Asian routes to modernity have themselves began to exert significant influence in much of the Global South, where discontents with Western neo-liberalism, the IMF, role of the US$ and American economic and strategic policies, provide fertile ground. Discontents that have been significantly increased by the GFC, and subsequent policies of the Federal Reserve. More broadly, there are signs within the West of popular discontents with the neoliberalism that dominate the ‘long-1990s’.  Discontents that may herald changes in the international order (not least with respect to the USA and China) and the dominant economic discourse. It may be that the West is at last beginning to learning from the GFC, in the way that East Asia did from 1997. Will the GFC prove to be as pivotal for           the West and perhaps the global system as a whole, as the AFC17   appears to have been for East Asia?



  1. Here East Asia covers both South East and North East Asia.
  2. Malaysia was less seriously affected than these four economies, largely because its capital account had not been as fully liberalised and its corporate sector was much less dependent on bank credit. This enabled the government to reject IMF assistance (a move that were criticised in the strongest terms by the international agencies and almost all Western commentators) and raise sufficient international commercial funds to engage in ultimately successful bailouts, reform and substantial restructuring of its financial sector. See  for example Mah-Hui Lim and Soo-Khoon Goh (2012 ) ‘How Malaysia Weathered the Financial Crisis: Policies and Possible Lessons’,  Aniket Bhushan  (ed), How to Prevent the Next Crisis: Lessons from Country Experiences of the Global Financial Crisis, North South Institute: 74-93 – http://www.nsi-ins.ca/wp-content/uploads/2012/09/2012-How-to-prevent-the-next-crisis.pdf
  3. IMF Managing Director Michael Camdessus – cited Far Eastern Economic Review 18 December 1997: 64. See also amongst an enormous literature the early stage of the crisis summary: Rosenberg, L. R. (1997) ‘Southeast Asia’s currency crisis: a diagnosis and prescription’, Contemporary Southeast Asia, 19:  223–251.
  4. Dash, K. C. (2003) ‘The Asian economic crisis and the role of the IMF’, in Goddard, C. R., Cronin, P. and Dash, K. C. (eds), International political economy, Palgrave Macmillan, London: 269-290.
  5. In the wake of the Latin American debt crisis Indonesia, the Philippines, South Korea and Thailand had to resort to IMF assistance and were put under Structural Adjustment Programmes. However, these were pale shadows of those inflicted on other parts of the Global South. In addition, the USA provided significant support for all four of the East Asian countries. See:  Dixon, C. (1995) ‘Structurally adjustment in comparative perspective: lessons from Pacific Asia’, in Simon, D. et al. (eds), Structurally adjusted Africa, Pluto, London: 202-228.
  6. Weisbrot, M. (2007) ‘Ten years after: The lasting impact of the Asian financial crisis’, Centre for Economic and Policy Research, Washington, http://www.cepr.net/
  7. Glen, J. and Singh, A. (2004) ‘Comparing capital structures and rates of return in developed and emerging markets’, Emerging Markets Review, Vol. 5 (2): 161-192; Sakakibara, E. (2003) ‘Asian cooperation and the end of the Pax Americana’, in Jan Jost Teunissen and Mark Teunissen (eds), Financial stability in emerging economies: the role of the financial sector, Fondad, The Hague: 227-244 (see in particular p.232).
  8. Mohanty, M. S. and Turner, P. (2010) ‘Banks and financial intermediation in emergent Asia: Reforms and new risks’, BIS Working Paper No. 313, Monetary and Economic Department, Bank for International Settlements, Washington: 20. For an over-view of East Asian banking reform see Dixon, C. (2016) ‘Why the Global Financial Crisis had so little impact on the banking systems of Emergent East Asia’,. Journal of Self-Governance and Management Economics, 4(2): 28–62.
  9. This includes the Executive Meeting of the East Asia and Pacific Central Banks (EMEAP). On 24 May 2017, EMEAP agreed to strengthen communication and cooperation between central banks in order to enhance regional economic resilience. The governors also discussed the development of a Monetary and Financial Stability Committee (MFSC) in relation to surveillance, research, and a regional crisis management framework. See also AMRO (2017) ‘The Inaugural Flagship Report: ASEAN+3 Economic Outlook’, Singapore, http://www.amro-Asia.org/wp-content/uploads/2017/05/AREO2017_Launch-PPT.pdf
  10. This was motived by the post-AFC need to promote growth and  a desire to reduce dependence on extra-regional markets and sources of finance.
  11. See Dixon C. (2013) ‘Emergent East Asia and the crisis: Why so resilient?’, GPI Opinion, 24 January.
  12. World Bank (2010a) ‘Robust recovery, rising risks’, East Asia and Pacific Economic Update 2010, Volume 1, Washington: 7-8.
  13. World Bank (2010a) ‘Robust recovery, rising risks’, East Asia and Pacific Economic Update 2010, Volume 1, Washington: 3-4.
  14. The GFC also generally reinforced views of the merits of Asian variations on more ‘statist’ developmental approach.
  15. These in addition to issues relating to continuing (if in some cases much reduced) poverty and income inequality, pollution, environmental disasters and degradation (exacerbated by climate change), and rapid urbanisation.
  16. BIS (2017) 87th Annual Report, 25 June, Geneva
  17. In this context, and with the benefit of hindsight, perhaps the AFC should be seen as the first major crisis of neoliberal globalisation.