1997 Asian Financial Crisis - Wikipedia, The Free Encyclopedia

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1/19 en.wikipedia.org/wiki/East_Asian_Financial_Crisis
Countries most affected by the Asian
crisis.
1997 Aian financial cii
From Wikipedia, the free encyclopedia
(Redirected from East Asian Financial Crisis)
The Aian financial cii was a period of
financial crisis that gripped much of Asia
beginning in July 1997, and raised fears of a
worldwide economic meltdown due to financial
contagion.
The crisis started in Thailand with the financial
collapse of the Thai baht caused by the decision
of the Thai government to float the baht, cutting
its peg to the U.S. dollar, after exhaustive efforts
to support it in the face of a severe financial
overextension that was in part real estate driven.
At the time, Thailand had acquired a burden of
foreign debt that made the country effectively
bankrupt even before the collapse of its currency.
As the crisis spread, most of Southeast Asia and
Japan saw slumping currencies, devalued stock markets and other asset prices, and a
precipitous rise in private debt.
[1]
Though there has been general agreement on the existence of a crisis and its
consequences, what is less clear are the causes of the crisis, as well as its scope and
resolution. Indonesia, South Korea and Thailand were the countries most affected by the
crisis. Hong Kong, Malaysia, Laos and the Philippines were also hurt by the slump. The
People's Republic of China, Pakistan, India, Taiwan, Singapore, Brunei and Vietnam were
less affected, although all suffered from a loss of demand and confidence throughout the
region.
Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of
Southeast Asian Nations economies in 199396, then shot up beyond 180% during the
worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as
40%, while the other northern newly industrialized countries fared much better. Only in
Thailand and South Korea did debt service-to-exports ratios rise.
[2]
Although most of the governments of Asia had seemingly sound fiscal policies, the
International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize
the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by
the crisis. The efforts to stem a global economic crisis did little to stabilize the domestic
situation in Indonesia, however. After 30 years in power, President Suharto was forced to
step down on 21 May 1998 in the wake of widespread rioting that followed sharp price
increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered
through 1998. In 1998 the Philippines growth dropped to virtually zero. 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. By 1999, however, analysts saw signs that the economies of Asia were
beginning to recover.
[3]
Contents
1 History
2 IMF role
2.1 IMF and high interest rates
3 Thailand
4 Indonesia
5 South Korea
6 Philippines
7 Malaysia
8 Singapore
9 China
10 United States and Japan
11 Consequences
11.1 Asia
11.2 Outside Asia
12 See also
13 References
14 External links
Histor
Until 1997, Asia attracted almost half of the total capital inflow into developing countries.
The economies of Southeast Asia in particular maintained high interest rates attractive to
foreign investors looking for a high rate of return. As a result the region's economies
received a large inflow of money and experienced a dramatic run-up in asset prices. At the
same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South
Korea experienced high growth rates, 812% GDP, in the late 1980s and early 1990s. This
achievement was widely acclaimed by financial institutions including the IMF and World
Bank, and was known as part of the "Asian economic miracle".
In 1994, noted economist Paul Krugman published an article attacking the idea of an
"Asian economic miracle".
[4]
He argued that East Asia's economic growth had historically
been the result of increasing capital investment. However, total factor productivity had
increased only marginally or not at all. Krugman argued that only growth in total factor
productivity, and not capital investment, could lead to long-term prosperity. Krugman's
views would be seen by many as prescient after the financial crisis had become apparent,
though he himself stated that he had not predicted the crisis nor foreseen its depth.
[5]
The causes of the debacle are many and disputed. Thailand's economy developed into a
bubble fueled by "hot money". More and more was required as the size of the bubble
grew. The same type of situation happened in Malaysia, and Indonesia, which had the
added complication of what was called "crony capitalism".
[6]
The short-term capital flow
was expensive and often highly conditioned for quick profit. 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.
[7]
Another major factor was that
these countries became excessively dependent upon exports for their economy. Indonesia,
Philippines and Thailand had seen their exports to GDP ratio grow from average 35% in
1996 to over 55% in 1998. Such huge dependence upon trade made these countries
susceptible to currency movements. At the time of the mid-1990s, Thailand, Indonesia and
South Korea had large private current account deficits and the maintenance of fixed
exchange rates encouraged external borrowing and led to excessive exposure to foreign
exchange risk in both the financial and corporate sectors. In the mid-1990s, two factors
began to change their economic environment. As the U.S. economy recovered from a
recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began
to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive
investment destination relative to Southeast Asia, which had been attracting hot money
flows through high short-term interest rates, and raised the value of the U.S. dollar. For the
Southeast Asian nations which had currencies pegged to the U.S. dollar, the higher U.S.
dollar caused their own exports to become more expensive and less competitive in the
global markets. At the same time, Southeast Asia's export growth slowed dramatically in
the spring of 1996, deteriorating their current account position.
Some economists have advanced the growing exports of China as a contributing factor to
ASEAN nations' export growth slowdown, though these economists maintain the main
cause of the crises was excessive real estate speculation.
[8]
China had begun to compete
effectively with other Asian exporters particularly in the 1990s after the implementation of
a number of export-oriented reforms. Other economists dispute China's impact, noting
that both ASEAN and China experienced simultaneous rapid export growth in the early
1990s.
[9]
Many economists believe that the Asian crisis was created not by market psychology or
technology, but by policies that distorted incentives within the lenderborrower
eaihi. The eig age aiie f cedi ha becae aaiabe geeaed a
high eeaged ecic ciae, ad hed ae ice a aiabe
ee.
[10]
Thee ae ice eea bega cae, caig idiida ad
caie defa deb bigai. The eig aic ag ede ed a age
ihdaa f cedi f he cii cie, caig a cedi cch ad fhe
bacie. I addii, a feig ie aeed ihda hei e, he
echage ae a fded ih he cecie f he cii cie, ig
deeciaie ee hei echage ae. T ee cec ae caig, hee
cie' gee aied deic iee ae eceedig high ee ( he
diiih figh f caia b aig edig e aacie ie) ad ieee i
he echage ae, big a ece deic cec a he fied echage ae
ih feig eee. Neihe f hee ic ee cd be aied f g. Ve
high iee ae, hich ca be eee daagig a ec ha i heah,
eaed fhe hac ecie i a aead fagie ae, hie he cea ba
ee hehagig feig eee, f hich he had fiie a. Whe i becae
cea ha he ide f caia feeig hee cie a be ed, he ahiie
ceaed defedig hei fied echage ae ad aed hei cecie fa. The
eig deeciaed ae f he cecie ea ha feig cec-deiaed
iabiiie ge baia i deic cec e, caig e bacie ad
fhe deeeig he cii.
Ohe eci, icdig Jeh Sigi ad Jeffe Sach, hae daed he e
f he ea ec i he cii caed he fiacia ae. The aidi ih
hich he cii haeed ha ed Sach ad he cae i a caic ba
ed b a dde i hc. Sach ied ic ea ad cac
fica icie ieeed b he gee he adice f he IMF i he ae f
he cii, hie Fedeic Mihi i he e f aeic ifai i he
fiacia ae ha ed a "hed eai" ag ie ha agified a a i
i he ea ec. The cii ha h aaced iee f behaia eci
ieeed i ae chg. Ahe ibe cae f he dde i hc a
a be aibabe he hade f Hg Kg eeig 1 J 1997. Dig he
1990, h e fe i he Shea Aia egi b ie ee fe iga f
he aca fdaea i fie f he eecie ecie. The ceai
egadig he fe f Hg Kg ed ie hi ee fhe aa f Aia,
eacebaig ecic cdii i he aea (bee eadig he deeciai f
he Thai bah 2 J 1997).
[11]
The feig iie f he 10 ASEAN cie beieed ha he e c-diaed
aiai f hei cecie a a deibeae ae deabiie he ASEAN
ecie. Fe Maaia Pie Miie Mahahi Mhaad acced Gege S
f iig Maaia' ec ih "aie cec ecai." (S cai
hae bee a be f he iggi dig i fa, haig d i h i 1997.) Mahahi'
claims were couched in antisemitic terms,
|12|
and in 2006 he apologized and withdrew the
accusations.
|13|
At the 30th ASEAN Ministerial Meeting held in Subang Jaya, Malaysia, the Ioreign
ministers issued a joint declaration on 25 July 1997 expressing serious concern and called
Ior Iurther intensiIication oI ASEAN's cooperation to saIeguard and promote ASEAN's
interest in this regard.
|14|
Coincidentally, on that same day, the central bankers oI most oI
the aIIected countries were at the EMEAP (Executive Meeting oI East Asia PaciIic)
meeting in Shanghai, and they Iailed to make the 'New Arrangement to Borrow'
operational. A year earlier, the Iinance ministers oI these same countries had attended the
3rd APEC Iinance ministers meeting in Kyoto, Japan on 17 March 1996, and according to
that joint declaration, they had been unable to double the amounts available under the
'General Agreement to Borrow' and the 'Emergency Finance Mechanism'. As such, the
crisis could be seen as the Iailure to adequately build capacity in time to prevent Currency
Manipulation. This hypothesis enjoyed little support among economists, however, who
argue that no single investor could have had enough impact on the market to successIully
manipulate the currencies' values. In addition, the level oI organization necessary to
coordinate a massive exodus oI investors Irom Southeast Asian currencies in order to
manipulate their values rendered this possibility remote.
|ciaion needed|
IMF ole
Such was the scope and the severity oI the collapses involved that outside intervention,
considered by many as a new kind oI colonialism,
|15|
became urgently needed. Since the
countries melting down were among not only the richest in their region, but in the world,
and since hundreds oI billions oI dollars were at stake, any response to the crisis was
likely to be cooperative and international, in this case through the International Monetary
Fund (IMF). The IMF created a series oI bailouts ("rescue packages") Ior the most-
aIIected economies to enable aIIected nations to avoid deIault, tying the packages to
reIorms that were intended to make the restored Asian currency, banking, and Iinancial
systems more like those oI the United States and Europe. In other words, the IMF's
support was conditional on a series oI drastic economic reIorms inIluenced by neoliberal
economic principles called a "structural adjustment package" (SAP). The SAPs called on
crisis-struck nations to reduce government spending and deIicits, allow insolvent banks
and Iinancial institutions to Iail, and aggressively raise interest rates. The reasoning was
that these steps would restore conIidence in the nations' Iiscal solvency, penalize insolvent
companies, and protect currency values. Above all, it was stipulated that IMF-Iunded
capital had to be administered rationally in the Iuture, with no Iavored parties receiving
Iunds by preIerence. In at least one oI the aIIected countries the restrictions on Ioreign
ownership were greatly reduced.
|16|
There were to be adequate government controls set
up to supervise all Iinancial activities, ones that were to be independent, in theory, oI
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 Asia, as a condition for IMF support. In addition,
financial systems were to become "transparent", that is, provide the kind of reliable
financial information used in the West to make sound financial decisions.
[17]
However, the greatest criticism of the IMF's role in the crisis was targeted towards its
response.
[18]
As country after country fell into crisis, many local businesses and
governments that had taken out loans in US dollars, which suddenly became much more
expensive relative to the local currency which formed their earned income, found
themselves unable to pay their creditors. The dynamics of the situation were similar to that
of the Latin American debt crisis. The effects of the SAPs were mixed and their impact
controversial. Critics, however, noted the contractionary nature of these policies, arguing
that in a recession, the traditional Keynesian response was to increase government
spending, prop up major companies, and lower interest rates. The reasoning was that by
stimulating the economy and staving off recession, governments could restore confidence
while preventing economic loss. They pointed out that the U.S. government had pursued
expansionary policies, such as lowering interest rates, increasing government spending,
and cutting taxes, when the United States itself entered a recession in 2001, and arguably
the same in the fiscal and monetary policies during the 20082009 Global Financial Crisis.
The reforms were, in most cases, long needed
[ciaion needed]
and the countries most
involved almost completely restructured their financial frameworks. They suffered
permanent currency devaluations, massive numbers of bankruptcies, collapses of whole
sectors of once-booming economies, real estate busts, high unemployment, and social
unrest. For most of the countries involved, IMF intervention has been roundly criticized.
The role of the International Monetary Fund was so controversial during the crisis that
many locals called the financial crisis the "IMF crisis".
[19]
Many commentators in
retrospect criticized the IMF for encouraging the developing economies of Asia down the
path of "fast track capitalism", meaning liberalization of the financial sector (elimination of
restrictions on capital flows), maintenance of high domestic interest rates to attract
portfolio investment and bank capital, and pegging of the national currency to the dollar to
reassure foreign investors against currency risk.
[18]
IMF and high inee ae
The conventional high-interest-rate economic wisdom is normally employed by monetary
authorities to attain the chain objectives of tightened money supply, discourged currency
speculation, stabilized exchange rate, curbed currency depreciation, and ultimately
contained inflation.
In the Asian meltdown, highest IMF officials rationalized their prescribed high interest
rates as follows:
From then IMF First Deputy Managing Director, Stanley Fischer (Stanley Fischer, "The
IMF and the Asian Crisis," Forum Funds Lecture at UCLA, Los Angeles on March 20,
1998):
When their governments "approached the IMF, the reserves of Thailand and South
Korea were perilously low, and the Indonesian Rupiah was excessively depreciated.
Thus, the first order of business was... to restore confidence in the currency. To
achieve this, countries have to make it more attractive to hold domestic currency,
which in turn, requires increasing interest rates temporarily, even if higher interest costs
complicate the situation of weak banks and corporations...
"Why not operate with lower interest rates and a greater devaluation? This is a relevant
tradeoff, but there can be no question that the degree of devaluation in the Asian
countries is excessive, both from the viewpoint of the individual countries, and from
the viewpoint of the international system. Looking first to the individual country,
companies with substantial foreign currency debts, as so many companies in these
countries have, stood to suffer far more from currency (depreciation) than from a
temporary rise in domestic interest rates. Thus, on macroeconomics monetary
policy has to be kept tight to restore confidence in the currency...."
From the then IMF Managing Director Michel Camdessus ("Doctor Knows Best?"
Asiaweek, 17 July 1998, p. 46):
"To reverse (currency depreciation), countries have to make it more attractive to hold
domestic currency, and that means temporarily raising interest rates, even if this (hurts)
weak banks and corporations."
Thailad
Further information: Econom of Thailand
From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the
highest economic growth rate of any country at the time. Inflation was kept reasonably low
within a range of 3.45.7%.
[20]
The baht was pegged at 25 to the US dollar.
On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30
June 1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht.
This was the spark that ignited the Asian financial crisis as the Thai government failed to
defend the baht, which was pegged to the basket of currencies in which the U.S. dollar
was the main component,
[21]
against international speculators. Thailand's booming
economy came to a halt amid massive layoffs in finance, real estate, and construction that
eled in hge nmbe of oke ening o hei illage in he conide and
600,000 foeign oke being en back o hei home conie.
[22]
The bah dealed
ifl and lo moe han half of i ale. The bah eached i loe poin of 56 ni o
he US dolla in Jana 1998. The Thai ock make dopped 75%. Finance One, he
lage Thai finance compan nil hen, collaped.
[23]
The Thai goenmen a eenall foced o floa he Bah, on 2 Jl 1997. On 11
Ag 1997, he IMF neiled a ece package fo Thailand ih moe han $17 billion,
bjec o condiion ch a paing la elaing o bankpc (eoganiing and
ecing) pocede and eablihing ong eglaion fameok fo bank and
ohe financial iniion. The IMF appoed on 20 Ag 1997, anohe bailo
package of $3.9 billion.
B 2001, Thailand' econom had ecoeed. The inceaing a eene alloed he
con o balance i bdge and epa i deb o he IMF in 2003, fo ea ahead of
chedle. The Thai bah conined o appeciae o 29 Bah o he Dolla in Ocobe 2010.
Indoneia
See also: Fall of Suharto and Econom of Indonesia
In Jne 1997, Indoneia eemed fa fom cii. Unlike Thailand, Indoneia had lo
inflaion, a ade pl of moe han $900 million, hge foeign echange eee of
moe han $20 billion, and a good banking eco. B a lage nmbe of Indoneian
copoaion had been booing in U.S. dolla. Ding he peceding ea, a he
piah had enghened epecie o he dolla, hi pacice had oked ell fo hee
copoaion; hei effecie leel of deb and financing co had deceaed a he local
cenc' ale oe.
In Jl 1997, hen Thailand floaed he bah, Indoneia' monea ahoiie idened he
piah ading band fom 8% o 12%. The piah ddenl came nde eee aack in
Ag. On 14 Ag 1997, he managed floaing echange egime a eplaced b a
fee-floaing echange ae aangemen. The piah dopped fhe. The IMF came
foad ih a ece package of $23 billion, b he piah a inking fhe amid fea
oe copoae deb, maie elling of piah, and ong demand fo dolla. The piah
and he Jakaa Sock Echange oched a hioic lo in Sepembe. Mood' eenall
dongaded Indoneia' long-em deb o 'jnk bond'.
[24]
Alhogh he piah cii began in Jl and Ag 1997, i inenified in Noembe hen
he effec of ha mme dealaion hoed p on copoae balance hee.
Companie ha had booed in dolla had o face he highe co impoed pon hem
b he piah' decline, and man eaced b bing dolla hogh elling piah,
undermining the value of the latter further. In February 1998, President Suharto sacked
Bank Indonesia Governor J. Soedradjad Djiwandono, but this proved insufficient. Suharto
resigned under public pressure in May 1998 and Vice President B. J. Habibie was elevated
in his place. Before the crisis, the exchange rate between the rupiah and the dollar was
roughly 2,600 rupiah to 1 USD.
[25]
The rate plunged to over 11,000 rupiah to 1 USD on 9
January 1998, with spot rates over 14,000 during January 2326 and trading again over
14,000 for about six weeks during JuneJuly 1998. On 31 December 1998, the rate was
almost exactly 8,000 to 1 USD.
[26]
Indonesia lost 13.5% of its GDP that year.
Soh Korea
Further information: Econom of South Korea
The banking sector was burdened with non-performing loans as its large corporations
were funding aggressive expansions. During that time, there was a haste to build great
conglomerates to compete on the world stage. Many businesses ultimately failed to ensure
returns and profitability. The South Korean conglomerates, more or less completely
controlled by the government, simply absorbed more and more capital investment.
Eventually, excess debt led to major failures and takeovers. For example, in July 1997,
South Korea's third-largest car maker, Kia Motors, asked for emergency loans. In the
wake of the Asian market downturn, Moody's lowered the credit rating of South Korea
from A1 to A3, on 28 November 1997, and downgraded again to B2 on 11 December.
That contributed to a further decline in South Korean shares since stock markets were
already bearish in November. The Seoul stock exchange fell by 4% on 7 November 1997.
On 8 November, it plunged by 7%, its biggest one-day drop to that date. And on 24
November, stocks fell a further 7.2% on fears that the IMF would demand tough reforms.
In 1998, Hyundai Motors took over Kia Motors. Samsung Motors' $5 billion venture was
dissolved due to the crisis, and eventually Daewoo Motors was sold to the American
company General Motors (GM).
The South Korean won, meanwhile, weakened to more than 1,700 per U.S. dollar from
around 800. Despite an initial sharp economic slowdown and numerous corporate
bankruptcies, South Korea has managed to triple its per capita GDP in dollar terms since
1997. Indeed, it resumed its role as the world's fastest-growing economysince 1960, per
capita GDP has grown from $80 in nominal terms to more than $21,000 as of 2007.
However, like the chaebol, South Korea's government did not escape unscathed. Its
national debt-to-GDP ratio more than doubled (approximately 13% to 30%) as a result of
the crisis.
In South Korea, the crisis is also commonly referred to as the IMF crisis.
Philippines
Further information: Econom of the Philippines
The Philippine cenal bank aied inee ae b 1.75 pecenage poin in Ma 1997
and again b 2 poin on 19 Jne. Thailand iggeed he cii on 2 Jl and on 3 Jl, he
Philippine Cenal Bank ineened o defend he peo, aiing he oenigh ae fom 15%
o 32% a he one of he Aian cii in mid-Jl 1997. The peo dopped fom 26 peo
pe dolla a he a of he cii o 38 peo in mid-1999 o 54 peo a in eal Ag,
2001.
The Philippine GDP conaced b 0.6% ding he o pa of he cii, b ge b
3% b 2001, depie candal of he adminiaion of Joeph Eada in 2001, mo
noabl he "jeeng" candal, caing he PSE Compoie Inde, he main inde of he
Philippine Sock Echange, o fall o 1000 poin fom a high of 3000 poin in 1997. The
peo' ale declined o abo 55 peo o he US dolla. Lae ha ea, Eada a on
he ege of impeachmen b hi allie in he enae oed again conining he
poceeding. Thi led o popla poe clminaing in he "EDSA II Reolion", hich
effeced hi eignaion and eleaed Gloia Macapagal-Aoo o he peidenc. Aoo
leened he cii in he con. The Philippine peo oe o abo 50 peo b he
ea' end and aded a aond 41 peo o a dolla in lae 2007. The ock make alo
eached an all ime high in 2007 and he econom a going b moe han 7 pecen, i
highe in neal o decade.
Malasia
Further information: Econom of Malasia
Befoe he cii, Malaia had a lage cen accon defici of 5% of i GDP. A he
ime, Malaia a a popla inemen deinaion, and hi a efleced in KLSE
acii hich a eglal he mo acie ock echange in he old (ih noe
eceeding een make ih fa highe capialiaion like he Ne Yok Sock Echange).
Epecaion a he ime ee ha he goh ae old conine, popelling Malaia o
deeloped a b 2020, a goenmen polic aiclaed in Waaan 2020. A he a
of 1997, he KLSE Compoie inde a aboe 1,200, he inggi a ading aboe 2.50
o he dolla, and he oenigh ae a belo 7%.
In Jl 1997, ihin da of he Thai bah dealaion, he Malaian inggi a
"aacked" b peclao. The oenigh ae jmped fom nde 8% o oe 40%. Thi
led o aing dongade and a geneal ell off on he ock and cenc make. B end
of 1997, aing had fallen man noche fom inemen gade o jnk, he KLSE had
lo moe han 50% fom aboe 1,200 o nde 600, and he inggi had lo 50% of i
ale, falling fom aboe 2.50 o nde 4.57 on (Jan 23, 1998) o he dolla. The hen
pemie, Mahahi Mohammad impoed ic capial conol and inodced a 3.80 peg
again he US dolla.
In 1998, he op of he eal econom declined plnging he con ino i fi
eceion fo man ea. The concion eco conaced 23.5%, manfacing
hnk 9% and he agicle eco 5.9%. Oeall, he con' go domeic podc
plnged 6.2% in 1998. Ding ha ea, he inggi plnged belo 4.7 and he KLSE fell
belo 270 poin. In Sepembe ha ea, aio defenie meae ee annonced o
oecome he cii. The pincipal meae aken ee o moe he inggi fom a fee floa
o a fied echange ae egime. Bank Negaa fied he inggi a 3.8 o he dolla. Capial
conol ee impoed hile aid offeed fom he IMF a efed. Vaio ak foce
agencie ee fomed. The Copoae Deb Recing Commiee deal ih copoae
loan. Danahaa diconed and bogh bad loan fom bank o faciliae odel ae
ealiaion. Danamodal ecapialied bank.
Goh hen eled a a loe b moe ainable pace. The maie cen accon
defici became a fail banial pl. Bank ee bee capialied and NPL ee
ealied in an odel a. Small bank ee bogh o b ong one. A lage nmbe
of PLC ee nable o eglae hei financial affai and ee delied. Compaed o he
1997 cen accon, b 2005, Malaia a eimaed o hae a US$14.06 billion
pl.
[27]
Ae ale hoee, hae no ened o hei pe-cii high. In 2005 he
la of he cii meae ee emoed a he inggi a aken off he fied echange
em. B nlike he pe-cii da, i did no appea o be a fee floa, b a managed
floa, like he Singapoe dolla.
Singapoe
Further information: Econom of Singapore
A he financial cii pead he econom of Singapoe dipped ino a ho eceion.
The ho daion and milde effec on i econom a cedied o he acie
managemen b he goenmen. Fo eample, he Monea Ahoi of Singapoe
alloed fo a gadal 20% depeciaion of he Singapoe dolla o chion and gide he
econom o a of landing. The iming of goenmen pogam ch a he Ineim
Upgading Pogam and ohe concion elaed pojec ee bogh foad. Inead
of alloing he labo make o ok, he Naional Wage Concil pe-empiel ageed o
Cenal Poiden Fnd c o loe labo co, ih limied impac on dipoable
income and local demand. Unlike in Hong Kong, no aemp a made o diecl
ineene in he capial make and he Sai Time Inde a alloed o dop 60%. In
le han a ea, he Singapoean econom fll ecoeed and conined on i goh
ajeco.
[28]
China
Further information: Econom of the People's Republic of China
The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of
8.3 RMB to the dollar, in 1994. Having largely kept itself above the fray throughout 1997
1998 there was heavy speculation in the Western press that China would soon be forced
to devalue its currency to protect the competitiveness of its exports vis-a-vis those of the
ASEAN nations, whose exports became cheaper relative to China's. However, the RMB's
non-convertibility protected its value from currency speculators, and the decision was
made to maintain the peg of the currency, thereby improving the country's standing within
Asia. The currency peg was partly scrapped in July 2005 rising 2.3% against the dollar,
reflecting pressure from the United States.
Unlike investments of many of the Southeast Asian nations, almost all of China's foreign
investment took the form of factories on the ground rather than securities, which insulated
the country from rapid capital flight. While China was unaffected by the crisis compared
to Southeast Asia and South Korea, GDP growth slowed sharply in 1998 and 1999, calling
attention to structural problems within its economy. In particular, the Asian financial crisis
convinced the Chinese government of the need to resolve the issues of its enormous
financial weaknesses, such as having too many non-performing loans within its banking
system, and relying heavily on trade with the United States.
Unied Sae and Japan
Further information: Econom of the United States and Econom of Japan
The "Asian flu" had also put pressure on the United States and Japan. Their markets did
not collapse, but they were severely hit. On 27 October 1997, the Dow Jones industrial
plunged 554 points or 7.2%, amid ongoing worries about the Asian economies. The New
York Stock Exchange briefly suspended trading. The crisis led to a drop in consumer and
spending confidence (see 27 October 1997 mini-crash). Indirect effects included the dot-
com bubble, and years later the housing bubble and the Subprime mortgage crisis. Japan
was affected because its economy is prominent in the region. Asian countries usually run a
trade deficit with Japan because the latter's economy was more than twice the size of the
rest of Asia together; about 40% of Japan's exports go to Asia. The Japanese yen fell to
147 as mass selling began, but Japan was the world's largest holder of currency reserves at
the time, so it was easily defended, and quickly bounced back. GDP real growth rate
slowed dramatically in 1997, from 5% to 1.6% and even sank into recession in 1998, due
to intense competition from cheapened rivals. The Asian financial crisis also led to more
bankruptcies in Japan. In addition, with South Korea's devalued currency, and China's
steady gains, many companies complained outright that they could not compete.
[29]
Another longer-term result was the changing relationship between the U.S. and Japan, with
the U.S. no longer openly supporting the highly artificial trade environment and exchange
rates that governed economic relations between the two countries for almost five decades
after World War II.
[30]
Consequences
Asia
The crisis had significant macroeconomic-level effects, including sharp reductions in
values of currencies, stock markets, and other asset prices of several Asian countries.
[31]
The nominal U.S. dollar GDP of ASEAN fell by US$9.2 billion in 1997 and $218.2 billion
(31.7%) in 1998. In South Korea, the $170.9 billion fall in 1998 was equal to 33.1% of the
1997 GDP.
[32]
Many businesses collapsed, and as a consequence, millions of people fell
below the poverty line in 19971998. Indonesia, South Korea and Thailand were the
countries most affected by the crisis.
Currenc
Echange
rate
(per US$1)
[33]
Change
June
1997
July
1998
Thai baht 24.5 41
40.2%
Indonesian
rupiah
2,380 14,150
83.2%
Philippine
peso
26.3 42
37.4%
Malaysian
ringgit
2.5 4.1
39.0%
South
Korean won
850 1,290
34.1%
Countr
GNP (US$1
billion)
[33]
Change
June
1997
July
1998
Thailand
170 102
40.0%
Indonesia
205 34
83.4%
Philippines
75 47
37.3%
Malaysia
90 55
38.9%
South
Korea
430 283
34.2%
The above tabulation shows that despite the prompt raising of interest rates to 32% in the
Philippines upon the onset of crisis in mid-July 1997, and to 65% in Indonesia upon the
intensification of crisis in 1998, their local currencies depreciated just the same and did not
perform better than those of South Korea, Thailand, and Malaysia, which countries had
their high interest rates set at generally lower than 20% during the Asian crisis. This created
grave doubts on the credibility oI IMF and the validity oI its high-interest-rate prescription
to economic crisis.
The economic crisis also led to a political upheaval, most notably culminating in the
resignations oI President Suharto in Indonesia and Prime Minister General Chavalit
Yongchaiyudh in Thailand. There was a general rise in anti-Western sentiment, with
George Soros and the IMF in particular singled out as targets oI criticisms. Heavy U.S.
investment in Thailand ended, replaced by mostly European investment, though Japanese
investment was sustained.
|ciaion needed|
Islamic and other separatist movements
intensiIied in Southeast Asia as central authorities weakened.
|34|
More long-term consequences included reversal oI the relative gains made in the boom
years just preceding the crisis. Nominal US dollar GDP per capital Iell 42.3 in Indonesia
in 1997, 21.2 in Thailand, 19 in Malaysia, 18.5 in South Korea and 12.5 in the
Philippines.
|32|
The CIA World Factbook reported that the per capita income (measured
by purchasing power parity) in Thailand declined Irom $8,800 to $8,300 between 1997
and 2005; in Indonesia it declined Irom $4,600 to $3,700; in Malaysia it declined Irom
$11,100 to $10,400. Over the same period, world per capita income rose Irom $6,500 to
$9,300.
|35|
Indeed, the Central Intelligence Agency's analysis asserted that the economy oI
Indonesia was still smaller in 2005 than it had been in 1997, suggesting an impact on that
country similar to that oI the Great Depression. Within East Asia, the bulk oI investment
and a signiIicant amount oI economic weight shiIted Irom Japan and ASEAN to China and
India.
|36|
The crisis has been intensively analyzed by economists Ior its breadth, speed, and
dynamism; it aIIected dozens oI countries, had a direct impact on the livelihood oI
millions, happened within the course oI a mere Iew months, and at each stage oI the crisis
leading economists, in particular the international institutions, seemed a step behind.
Perhaps more interesting to economists was the speed with which it ended, leaving most
oI the developed economies unharmed. These curiosities have prompted an explosion oI
literature about Iinancial economics and a litany oI explanations why the crisis occurred. A
number oI critiques have been leveled against the conduct oI the IMF in the crisis,
including one by Iormer World Bank economist Joseph Stiglitz. Politically there were
some beneIits. In several countries, particularly South Korea and Indonesia, there was
renewed push Ior improved corporate governance. Rampaging inIlation weakened the
authority oI the Suharto regime and led to its toppling in 1998, as well as accelerating East
Timor's independence.
|37|
Oide Aia
AIter the Asian crisis, international investors were reluctant to lend to developing
countries, leading to economic slowdowns in developing countries in many parts oI the
world. The powerful negative shock also sharply reduced the price of oil, which reached a
low of about $11 per barrel towards the end of 1998, causing a financial pinch in OPEC
nations and other oil exporters. This reduction in oil revenue contributed to the 1998
Russian financial crisis, which in turn caused Long-Term Capital Management in the
United States to collapse after losing $4.6 billion in 4 months. A wider collapse in the
financial markets was avoided when Alan Greenspan and the Federal Reserve Bank of
New York organized a $3.625 billion bail-out. Major emerging economies Brazil and
Argentina also fell into crisis in the late 1990s (see Argentine debt crisis).
[38]
The crisis in general was part of a global backlash against the Washington Consensus and
institutions such as the IMF and World Bank, which simultaneously became unpopular in
developed countries following the rise of the anti-globalization movement in 1999. Four
major rounds of world trade talks since the crisis, in Seattle, Doha, Cancn, and Hong
Kong, have failed to produce a significant agreement as developing countries have become
more assertive, and nations are increasingly turning toward regional or bilateral free trade
agreements (FTAs) as an alternative to global institutions. Many nations learned from this,
and quickly built up foreign exchange reserves as a hedge against attacks, including Japan,
China, South Korea. Pan Asian currency swaps were introduced in the event of another
crisis. However, interestingly enough, such nations as Brazil, Russia, and India as well as
most of East Asia began copying the Japanese model of weakening their currencies,
restructuring their economies so as to create a current account surplus to build large
foreign currency reserves. This has led to an ever increasing funding for US treasury
bonds, allowing or aiding housing (in 20012005) and stock asset bubbles (in 19962000)
to develop in the United States.
See alo
Liquidity crisis
Financial contagion
List of finance topics
Stock disasters in Hong Kong
Refeence
Books
Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The Asian Financial Crisis:
Origins, Implications and Solutions. Springer. ISBN 0-7923-8472-5
Pettis, Michael (2001). The Volatilit Machine: Emerging Economies and the
Threat of Financial Collapse. Oxford University Press. ISBN 0-19-514330-2.
Blustein, Paul (2001). The Chastening: Inside the Crisis that Rocked the
Global Financial Sstem and Humbled the IMF. PublicAffairs. ISBN 1-
891620-81-9.
Fengbo Zhang: Opinion on Financial Cii, 6. Defeaing he Wold Financial
Som (hp://ie.google.com/ie/fengbohang3/) China Yoh Pblihing
Hoe (2000)
Noland, Mak, Li-gang Li, Sheman Robinon, and Zhi Wang. (1998)
Global Economic Effec of he Aian Cenc Dealaion. Polic Anale
in Inenaional Economic, no. 56. Wahingon, DC: Inie fo Inenaional
Economic.
Pempel, T. J. (1999) The Poliic of he Aian Economic Cii. Ihaca, NY:
Conell Uniei Pe.
Rie, Philippe. (2000) The Aian Som: Aia' Economic Cii Eamined.
Tecon, Macelo L. (2005) Ple: Economic Sing (The Cae Again IMF,
Cenal Bank, and IMF-Pecibed High Inee Rae) Makai Ci,
Philippine: Raide of he Lo Gold Pblicaion
Mchhala, Bhmika, ed. (2007) Ten Yea Afe: Reiiing he Aian
Financial Cii
(hp://.cep.ne/docmen/pblicaion/eneaafe_2007_11.pdf) .
Wahingon, DC: Woodo Wilon Inenaional Cene fo Schola Aia
Pogam.
Io, Takaohi and Ande K. Roe (2006). financial eco deelopmen in he
Pacific Rim. Uniei of Chicago Pe. ISBN 978-0-226-38684-3.
Pape
Ngian Kee Jin (Mach 2000). Coping ih he Aian Financial Cii: The
Singapoe Epeience (hp://.iea.ed.g/82000.pdf) . Inie of
Sohea Aian Sdie. ISSN 0219-3582
Tiai, Rajnih (2003). Po-cii Echange Rae Regime in Sohea Aia
(hp://.global-innoaion.ne/eam/iai/PDF/echange-ae.pdf) , Semina
Pape, Uniei of Hambg.
Kilgo, Andea (1999). The changing economic iaion in Vienam: A
podc of he Aian cii? (hp://.geog.ni-
goeingen.de/k/apa/pn/pn12/ienam.hml)
S. Radele, J.D. Sach, R.N. Coope, B.P. Booh (1998). The Ea Aian
Financial Cii: Diagnoi, Remedie, Popec
(hp://.jo.og/ie/00072303/di009478/00p0029/0/) . Booking Pape
on Economic Acii.
Sigli, Joeph (1996). Some Leon Fom The Ea Aian Miacle
(hp://bo.ofodjonal.og/conen/11/2/151.ho) . The Wold Bank
Reeach Obee.
Weibo, Mak (Ag 2007). Ten Yea Afe: The Laing Impac of he
Aian Financial Cii
(hp://.cep.ne/docmen/pblicaion/aia_cii_2007_08.pdf) . Cene
fo Economic and Polic Reeach.
Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass
Destruction: High Interest Rates" (4-part paper on high-interest-rate fallacies
and alternatives, emailed to IMF and others on 27 January 2009)
Other
Is Thailand on the road to recovery
(http://photojourn.wordpress.com/1999/03/01/) , article by Australian photo-
journalist John Le Fevre that looks at the effects of the Asian Economic Crisis
on Thailand's construction industry
Women bear brunt of crisis (http://photojourn.wordpress.com/category/1999-
posts/) , article by Australian photo-journalist John Le Fevre examining the
effects of the Asian Economic Crisis on Asia's female workforce
The Crash (http://www.pbs.org/wgbh/pages/frontline/shows/crash/) (transcript
only), from the PBS series Frontline
Specific
1. Kaufman: pp. 1956
2. http://www.adb.org/Documents/Books/Key_Indicators/2003/pdf/rt29.pdf
3. Pempel: pp 118143
4. Krugman, Paul (1994). "The Myth of Asia's Miracle". Foreign Affairs 73 (6): 6278.
JSTOR 20046929 (http://www.jstor.org/stable/20046929) .
5. The Myth of Asia's Miracle (http://web.mit.edu/krugman/www/myth.html) A Cautionary
Fable by Paul Krugman.
6. Hughes, Helen. Crony Capitalism and the East Asian Currency Financial 'Crises'
(http://www.cis.org.au/POLICY/Spr99/polspr99-1.htm) . Polic. Spring 1999.
7. Blustein: p. 73
8. The Three Routes to Financial Crises: The Need for Capital Controls
(http://www.newschool.edu/cepa/publications/workingpapers/archive/cepa0318.pdf) .
Gabriel Palma (Cambridge University). Center for Economic Policy Analysis. November
2000.
9. Bernard Eccleston, Michael Dawson, Deborah J. McNamara (1998). The Asia-Pacific
Profile (http://books.google.com/books?visbn=0415172799&id=l07ak-
yd6DAC&pg=RA1-PA311&lpg=RA1-
PA311&ots=XgqmmGV3CC&dq=%22Bangkok+Declaration%22+ASEAN&ie=ISO-8859-
1&output=html&sig=u2ddDhzn-yVhEn5Fwu3d8iih0OA) . Routledge (UK). ISBN 0-415-
17279-9. http://books.google.com/books?visbn=0415172799&id=l07ak-
yd6DAC&pg=RA1-PA311&lpg=RA1-
PA311&ots=XgqmmGV3CC&dq=%22Bangkok+Declaration%22+ASEAN&ie=ISO-8859-
1&output=html&sig=u2ddDhzn-yVhEn5Fwu3d8iih0OA.
10. FIRE-SALE FDI (http://web.mit.edu/krugman/www/FIRESALE.htm) by Paul Krugman.
11. Stiglitz: pp. 1216
12. "Mahathir's dark side" (http://www.telegraph.co.uk/comment/telegraph-
view/3597972/Mahathirs-dark-side.html) . The Dail Telegraph (London). 24 October
2003. http://www.telegraph.co.uk/comment/telegraph-view/3597972/Mahathirs-dark-
side.html.
13. http://www.abc.net.au/news/newsitems/200612/s1812946.htm
14. Joint Comminuque The 30th ASEAN Ministerial Meeting (AMM)
(http://www.asean.org/4010.htm) The Thirtieth ASEAN Ministerial Meeting was held in
Subang Jaya, Malaysia from 24 to 25 July 1997.
15. Halloran, Richard. China's Decisive Role in the Asian Financial Crisis
(http://www.bu.edu/globalbeat/pubs/ib24.html) . Global Beat Issue Brief No. 24. 27 January
1998.
16. Woo-Cumings, Meredith (July 2003), "South Korean Anti-Americanism"
(http://www.jpri.org/publications/workingpapers/wp93.html) , Woking Pape No. 93
(Japan Policy Research Institute),
http://www.jpri.org/publications/workingpapers/wp93.html Korea:"[T]he ceiling on foreign
ownership of publicly traded companies was raised to 50 percent from 26 percent; and the
ceiling on individual foreign ownership went up from 7 percent to 50 percent."
17. Noland: pp. 98103
18. ^
IMF's Role in the Asian Financial Crisis (http://www.ifg.org/imf_asia.html) by Walden

Bello.
19. The IMF Crisis (http://www.imfsite.org/recentfin/crisis.html) Editorial. Wall Street
Journal. 15 April 1998.
20. http://www.columbia.edu/cu/thai/html/financial97_98.html
21. Haider A. Khan, Global Markets and Financial Crises in Asia, University of Denver 2004
22. Kaufman: pp. 1938
23. Liebhold, David. Thailand's Scapegoat?
(http://www.time.com/time/asia/magazine/99/1227/thailand.finance.html) Battling
extradition over charges of embezzlement, a financier says he's the fall guy for the 1997
financial crash. Time.com. 27 December 1999.
24. Raghavan, Anita (26 December 1997). "Japan Stocks Slide Again On Fears About
Stability" (http://online.wsj.com/article/SB882840058627490500.html?mod=googlewsj) .
Wall Street Journal. http://online.wsj.com/article/SB882840058627490500.html?
mod=googlewsj. Retrieved 2 September 2009.
25. http://www.oanda.com/convert/fxhistory August 13 = 2673; August 14 = 2790; August 15
= 2900; August 31 = 2930; October 31 = 3640; December 31 = 5535. Accessed 2009-08-
20. Archived (http://www.webcitation.org/5jXUXlzHo) 2009-09-04.
26. http://www.oanda.com/convert/fxhistory January 31 = 10,100; March 31 = 8,650; May 31
= 11,350; July 31 = 13,250; September 30 = 10,800. Accessed 2009-08-20. Archived
(http://www.webcitation.org/5jXUXlzHo) 2009-09-04.
27. The CIA World Factbook - Malaysia (https://www.cia.gov/library/publications/the-world-
factbook/print/my.html)
28. Ngian Kee Jin: p. 12
29. Pettis: pp. 5560
30. Pettis: p. 79
31. Tiwari: pp. 13
32. ^
http://www.adb.org/Documents/Books/Key_Indicators/2001/rt11_ki2001.xls
33. ^
Cheetham, R. 1998. Asia Crisis. Paper presented at conference, U.S.-ASEAN-Japan

policy Dialogue. School of Advanced International Studies of Johns Hopkins University,
June 79, Washington, D.C.
34. Radelet: pp. 56
35. The Asian financial crisis ten years later: assessing the past and looking to the future
(http://ideas.repec.org/a/fip/fedfsp/y2007ifeb6.html) . Janet L. Yellen. Speech to the Asia
Society of Southern California, Los Angeles, California, 6 February 2007
Society of Southern California, Los Angeles, California, 6 February 2007
36. ^ Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the
Asian crisis?
37. ^ Weisbrot: p. 6
38. ^ The Cah transcript. PBS Frontline.
Eternal links
Impact on Indonesia (http://cdm164001.cdmhost.com/krogh/item_viewer.php?
CISOROOT=/p164001coll21&CISOPTR=255&CISOBOX=1&REC=2) from
the Dean Peter Krogh Foreign Affairs Digital Archives
(http://cdm164001.cdmhost.com/krogh/)
Congressional Research Service report for US Congress
(http://www.fas.org/man/crs/crs-asia2.htm)
Retrieved from "http://en.wikipedia.org/w/index.php?
title=1997_Asian_financial_crisis&oldid=472357039"
Categories: 1997 in Asia 1997 disasters 1997 in economics
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Economy of Singapore Economy of South Korea Economy of Thailand
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New Order (Indonesia) History of Singapore 20th century in Thailand
Economic history of South Korea Economic history of Japan
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