The 10th Anniversary of the Asian Financial Crisis: Lessons Learned, Critical Assessments, and Charting the Path Forward

This year marks ten years since the onset of the Asian financial and economic crisis, a critical event in contemporary economic history that had a profound impact on the people, the economies, and the stability of the Asian region. On May 16, the Asia Program, in co-sponsorship with the Science, Technology, America and the Global Economy Program of the Wilson Center, the Sasakawa Peace Foundation, and the Center for Economic and Policy Research, held an event to re-evaluate the Asian financial crisis of 1997-98. The Asian financial crisis was not only a financial crisis, but also a human crisis and a crisis of globalization. Decades of economic progress in East and Southeast Asia were jeopardized, as daunting levels of poverty, unemployment, and social inequality beset the most affected countries -- Indonesia, Thailand, Korea, the Philippines, and Malaysia. Ten years onwards, it is imperative to re-examine the debates on free capital mobility in developing countries, the role of international financial institutions, the structural flaws in domestic banking and financial sectors, and the macroeconomic policy framework that was used to respond to the Asian financial crisis. This conference sought to expand these debates in light of the significant global changes and developments that have occurred as a result of economic and financial globalization over the last decade.

Jomo Kwame Sundaram, a development economist and expert on Malaysia at the United Nations, led off the first panel by arguing that the lessons of the Asian financial crisis have yet to be incorporated by most of the affected Asian countries, in particular the recognition that financial globalization fundamentally increases vulnerability to financial crises. He emphasized several key areas that deserve more attention from the Asian region and from international institutions, including the need for counter-cyclical macroeconomic policies to reduce financial volatility, the importance of expansionary macroeconomic policy to strengthen human development, and the challenge of creating an inclusive international financial system where all levels of society can access credit. Soedradjad Djiwandono, former governor of Bank Indonesia during the Asian crisis, drew from his extensive experience in Indonesia to explain how Indonesia did not just become the epicenter of the financial crisis, but rather, experienced a different type of contagion as the financial crisis developed into a socio-political crisis. Indonesia was the most severely affected of all Asian countries, as its growth rate plunged to -15 percent and its currency depreciated by 80 percent. However, Djiwandono optimistically stated that the recovery and reform process for Indonesia has been steady over the last ten years, and that this has been achieved with a functioning democracy. Meredith Woo, a Korea expert and professor at the University of Michigan, stated that the passing of ten years is a “historical marker for an epoch that went up in flames,” as she drew a parallel between the financial crisis and the natural crisis of droughts and forest fires that struck East and Southeast Asia at the same time. The financial crisis, she asserted, brought an end to the “manufacturing miracle” of Asian countries and to the “subsidy-era.” For Indonesia and Malaysia, the Asian crisis led to the downfall of the authoritarian regimes of Soeharto and Mahathir, respectively.

David Burton, Asia and Pacific director at the International Monetary Fund (IMF), stated that the Asian region has reduced its vulnerabilities to financial shocks through several domestic reforms, such as building vast foreign exchange reserves and implementing greater transparency and reforms in the financial and corporate sectors. Burton declared that the IMF’s goal now is to help ensure regional financial stability through strengthened financial sector surveillance and close dialogue with Asian leaders, while recognizing the importance of country ownership. Robert Wade, a professor of political economy at the London School of Economics, argued that the Asian financial crisis provided a strong impetus to the creation of a “standards-surveillance-compliance (SSC) system,” where international financial norms and standards are enforced through peer pressure and market reactions. Wade asserted that the SSC system constitutes a significant change, as it enhances the “insertion of supranational authority into international financial markets,” leading to structural disadvantages and institutional constraints in developing Asian countries. Co-director of the Center for Economic and Policy Research Mark Weisbrot highlighted the key role that the Asian Monetary Fund, proposed by Japanese authorities at the height of the Asian financial crisis in the fall of 1997 and subsequently rejected by U.S. authorities, could have played in Asian financial stability. He argued that the macroeconomic policy reforms imposed by the IMF exacerbated the financial crisis in Indonesia, where the IMF called for the closing of 16 banks and instituted 140 policy conditions in its Letter of Intent with Indonesia.

Worapot Manupipatpong, the principal economist at the Association of Southeast Asian Nations (ASEAN), outlined the economic initiatives that ASEAN has developed in the last ten years, beginning with the Chiang Mai Initiative (CMI) in 2000. The CMI is a short-term financing facility of “bilateral swaps” that provides institutional support against financial crises. ASEAN strives to engage the private sector, as well as create a “conducive environment” where the region can progress. Ilene Grabel, professor of global finance at the University of Denver, called for “trip wires and speed bumps,” or early warning models, that could potentially bring financial crises to a halt before investor panic sets in and an economic recession takes place. She argued that in order to prevent future crises, national economic and financial policymakers need to consider financial and economic policies that follow national development needs. Nelson Barbosa Filho, secretary of economic monitoring in the Brazilian Ministry of Finance, examined the effects of the Asian financial crisis on Brazil and Argentina in subsequent years. In the wake of the Asian crisis, Brazil experienced speculative capital flows, increases in interest rates and public debt, and growth deceleration. In 2001, Argentina experienced fiscal and monetary contraction as banks collapsed and social and political crises took place. As the two economies have recovered, new challenges today include assessing the trade-offs between inflation targeting and growth acceleration, Sino-centric globalization, and global coordination on capital controls policy.



Drafted by Bhumika Muchhala, Asia Program Associate
Robert M. Hathaway, Director, Asia Program