During 1997-98, many of the East Asian tiger economies suffered a massive financial and economic crisis. It was a major blow to the economies that were displaying one of the most impressive growth rates in the world. These economies witnessed their currencies losing about 70% of their value. The crisis destroyed wealth on a massive scale and sent absolute poverty shooting up. The Asian economies were completely destabilised. More than two decades have passed and there were several changes that the Asian Crisis brought to the world.
It all began in the summer of 1997, when the currency markets first fell in Thailand. This had big consequences for the global financial markets, which had become increasingly exposed to the promise that Asia had seemed to offer. The precise cause of the crisis remains a matter of debate. Prima facie, this crisis is a complex problem that is multi-faceted. There were a lot of changes that the Asian Crisis brought to the perception of the entire continent’s ability to grow financially, with critics admonishing Asian economies for their cronyism, ill-disciplined banking and severe lack of transparency- an image that continues to bring disrepute to Asia. All the adulation of a distinct “Asia Way” of capitalism, that might prove just as successful as capitalism in America or Europe, suddenly vanished into thin air. It is tough to ascertain the exact cause of the crisis. Fortunately, repair work done by IMF and World Bank perhaps prevented matters from worsening. The impact was felt as far as the United States, Europe and even Russia. Many of the affected countries were showing signs of recovery by 1999 and resumed GDP growth.
One of the changes that the Asian Crisis brought was to the policies of the world’s governments. Many nations adopted protectionist measures to ensure the stability of their respective currencies. The crisis also led to some much-needed financial and government reforms in Asian countries like Thailand, South Korea, Japan and Indonesia. In the years following the crisis, most of the countries involved introduced reforms designed to increase transparency and improve the health of the banking system, although some such as South Korea went much further than others like Indonesia. The structural changes that the Asian Crisis brought to these economies is best brought out in the examples of the Korean chaebol. Companies like Samsung or Hyundai reinvented themselves as engines of global innovation, while others, such as Daewoo, were allowed to die. Most of the surviving companies didn’t pursue diversification as actively before the crisis as they did after it.
Further, countries chose different paths to recovery. The relatively tight fiscal stance of Indonesia, Korea, and Thailand was aimed at reviving private investors’ confidence towards stimulating output growth. Given the pressure on foreign reserves, it also aimed at strengthening external stability and stimulating net capital flows. In contrast, Malaysia and Philippines relied on fiscal spending to stimulate growth with the aim of stimulating domestic demand. There were also new regional institutions. After America’s initial rejection of Japan’s suggestion to have an Asian Monetary Fund, the Chang Mai Initiative was eventually crystallised concretely. The CMI is a multilateral currency swap agreement between the Association of Southeast Asian Nations (ASEAN), China, Japan and South Korea, in 2000. It is a regional financial safety net with the purpose of addressing the short-term liquidity difficulties in the region and supplement the existing financial facilities of the IMF.
There are several changes that the Asian Crisis brought and lessons that it taught. Firstly, investors must remain cautious of asset bubbles as some of them may end up bursting, leaving the investors devastated. Secondly, governments must keep an eye on spending as any infrastructure spending dictated by the government can easily contribute to the asset bubbles. Thirdly, fixed exchange rates need to be reconsidered. The examples of Malaysia and Thailand showed the disruptive effects of capital outflows. In retrospect, the Asian Crisis helped in the transition to flexible exchange rate regime and made the Asian economies less vulnerable to adverse changes in international capital markets, such as seen in 2008. Fourthly, self-insurance, albeit expensive, is the best way to secure resilience. The economies that were able to recover soon were the ones that had taken the extra effort to segment their foreign holdings into two distinct categories- reserves and wealth management.
This defensive approach helped several Asian economies lessen the cost of maintaining a high level of financial resilience. Further, liberalisation of economy must be done very carefully. While foreign capital inflows help in relieving financial constraints on the balance of payments and even the budget, they can turn around suddenly, undermining the financial system and sucking valuable oxygen out of the economy. Local businesses have also learned their lessons. Before 1997, local companies boosted their investments to unusually high levels. At its peak, for example, Malaysia’s private investment accounted for an unsustainable 36% of economic output. Much of this investment was in relatively unproductive areas such as office buildings and shopping malls, where demand was questionable. This stopped considerably after the crisis.
The businesses that survived the crisis suggest that size, sector, debt and diversification were important determinants. Large enterprises, operating mainly in the construction, real estate, and manufacturing sectors, with huge debt exposures, and whose diversification programs were speculative and loan-driven, were most seriously hit by the crisis. Those that survived the crisis were enterprises that remained prudent and selective in their operations and expansion. These “resilient” businesses displayed four characteristics: they engaged in “real” businesses producing goods and services; they were involved in economic sectors less vulnerable to the financial crisis; most concentrated on their core business; and they largely avoided crippling debt, having sufficient asset backing and income flow to service debt and retaining profits as reserves.
The impact of such a crisis is debilitating on the people. Several people lost their jobs as unemployment soared; suicide rates increased as a huge number of companies declared bankruptcy. Even students studying overseas were affected as they had to return home since they were unable to afford foreign education. Following the changes that the Asian Crisis brought, economies like Japan and Taiwan bounced back quickly and eventually managed to achieve enough escape velocity to rise to new heights. Across Asia, governments restructured financial systems. Businesses became wise and learned how to manage currency exposure well. Today, Asia is reasonably prosperous and is seen as a good investment destination.