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Asian Economic Crisis of 1997

About 5 pages (1,422 words)

1997 Asian Financial Crisis Summary

Asian Economic Crisis of 1997

By "Asian currencies" one normally means those of Japan and of the former Asian "tiger" countries—Korea (won), China (yuan), Hong Kong (dollar), Taiwan (dollar), the Philippines (peso), Thailand (baht), Malaysia (ringgit), Singapore (dollar), and Indonesia (rupiah)—all of which have been strongly impacted by the profound currency and banking crisis that has gripped Asia and much of the world since 1997. It began in the summer of that year with the decision of a desperate Thai government to float the baht after exhaustive efforts to support it in the face of a severe financial overextension that was in part real-estate driven. It sank like a rock and took Thailand with it. At the time Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. The drastically reduced import earnings that resulted from the forced devaluation then made a quick or even medium-term recovery impossible without strenuous international intervention.

From Thailand, contagion quickly spread south, all but closing down the Indonesian economy and severely impacting the Malaysian. In Indonesia, which was particularly hard it, it resulted in the 1998 fall of Indonesia's Suharto, whose power had once seemed a permanent fixture. Also severely impacted, once the contagion turned north, was Korea, which suffered a financial meltdown comparable to those of Thailand and Indonesia. In Hong Kong, which had the dubious benefit of a stable currency pegged to the dollar and the support of China, the currency and banking system survived but at the cost of a major recession. In the Philippines growth dropped to virtually zero in 1998. Only Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former more so due to its size and geographical location between Malaysia and Indonesia. Even before the crisis, Japan had been in a state of profound recession due to a highly inefficient banking system laboring under mountains of bad debt, much of which up to that point had been relatively invisible because of the established Japanese banking practice of hiding the losses of major customers. The ripple effect ultimately spread to Brazil and threatened to take Latin America down like a house of cards, too. If it had fallen, the United States might well have been pulled down as well.

Identifying the Causes

The causes of the debacle are many and disputed. Clearly Thailand was an economic catastrophe waiting to happen with an economy that was little more than a bubble fueled by "hot money," that is, short-term capital flow that is expensive and often highly conditioned (for quick profit), and with more and more required as the size of the bubble grew. Much the same can be said of Malaysia, although Malaysia had better political leadership, and Indonesia, with the added complication of what has been called "crony capitalism." Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power. In Korea, in the haste to build great, Japanese-style conglomerates to take on the world, Koreans forgot that the purpose of capital investment in a business is ultimately to ensure a return and profitability. The great Korean conglomerates, more or less completely controlled by the government, simply absorbed more and more capital and never looked back.

Other factors were globalization, in this case, the spread of American- and European-style capitalism to the entire world after the end of the Cold War, whether the world was ready for it or not, and economic shifts that have made much of the traditional Asian approach to business obsolete. One such shift has been the move to merchandising in which the consumer, not the producer, determines the product, contrary to recent Japanese and Korean practice. Another longer-term influence has been the changing relationship between the United States and Japan, with the United States no longer openly supporting the highly artificial trade environment and exchange rates that governed economic relations between the two countries for almost four decades after World War II.

International Response

Such was the scope and the severity of the collapses involved that outside intervention, considered by the Malaysians, among others, as a new kind of colonialism, became urgently needed. Since the countries melting down were among not only the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to the crisis had to be cooperative and international, in this case through the International Monetary Fund (IMF). The IMF created a series of bailout packages for the most affected economies, tying the packages to reforms that were intended to make the restored Asian currency, banking, and financial systems as much like those of the United States and Europe as possible.

Above all, capital had to be administered democratically in the future, with no favored parties receiving funds by preference. There had to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvency itself had to be clearly defined. In short, exactly the same kinds of financial institutions found in the United States and Europe had to be created in Indonesia, Korea, and elsewhere, as a price for IMF support. In addition, financial systems had to become "transparent," that is, provide the kind of reliable financial information used in the West to make sound financial decisions. No more massive losses under the table, as in Japan, or loans off the books.

Although such reforms were, in most cases, long needed, the countries most involved—Korea, Thailand, and Indonesia—have ended up undergoing an almost complete political and financial restructuring. They have suffered permanent currency devaluations, massive numbers of bankruptcies, collapses of whole sectors of once-booming economies, real estate busts, high unemployment, and social unrest. Even the Philippines, which came through the storm less damaged than other economies, has also had to suffer severe IMF intervention, while Malaysia has walled itself off from the world and gone its own way (only Singapore, with its rigid control system, and China and Hong Kong, isolated from the turmoil by the controls of the Chinese currency system, have come through the storm relatively unaffected). For most of the countries involved, IMF intervention has been a bitter pill for which the international agency has been roundly criticized and a bitter pill that may or may not result in the regional renewal the IMF expects.

Assessment

The story of Asian currencies recently has been the story of the decline and fall or near-fall of the Asian "tigers," but their problems are by no means unique to them, and the recent crisis may be just the first of many. The United States, for example, has had its own financial bubble fueled by consumer debt and overpriced stocks (although the rapid depreciation of many stock values recently has now reduced this danger), and a U.S. meltdown could involve many of the recovering Asian states (especially Korea) in a new round of collapse, including, this time, some that were relatively spared by the last crisis. This specter was raised again after 11 September 2001, when the economic ripples of the shock and U.S. recession were felt as far afield as Mongolia.

China, which kept itself above the fray in 1997 and 1998, depends heavily on trade with the United States and suffers from enormous financial weaknesses, including a primitive and inefficient banking system with too many bad loans, leaving aside the issue of a public sector that is just too big and too inefficient. Another cause of contagion may be Russia, which has absorbed masses of aid funds, including gigantic IMF loans. Although economic growth has resumed again under Putin, the economy remains fragile, and a Russian meltdown would take much of Europe with it— and Europe, with the United States, is a major funder of the IMF. Deprived of most of its funds, the IMF would then be unable to intervene in even a minor Asian state with currency or other financial problems.