Asian financial crisis

Asian financial crisis, major global financial crisis that destabilized the Asian economy and then the world economy at the end of the 1990s.

The 1997–98 Asian financial crisis began in Thailand and then quickly spread to neighbouring economies. It began as a currency crisis when Bangkok unpegged the Thai baht from the U.S. dollar, setting off a series of currency devaluations and massive flights of capital. In the first six months, the value of the Indonesian rupiah was down by 80 percent, the Thai baht by more than 50 percent, the South Korean won by nearly 50 percent, and the Malaysian ringgit by 45 percent. Collectively, the economies most affected saw a drop in capital inflows of more than $100 billion in the first year of the crisis. Significant in terms of both its magnitude and its scope, the Asian financial crisis became a global crisis when it spread to the Russian and Brazilian economies.

The significance of the Asian financial crisis is multifaceted. Though the crisis is generally characterized as a financial crisis or economic crisis, what happened in 1997 and 1998 can also be seen as a crisis of governance at all major levels of politics: national, global, and regional. In particular, the Asian financial crisis revealed the state to be most inadequate at performing its historical regulatory functions and unable to regulate the forces of globalization or the pressures from international actors. Although Malaysia’s controls on short-term capital were relatively effective at stemming the crisis in Malaysia and attracted much attention for Prime Minister Mahathir bin Mohamad’s ability to resist International Monetary Fund (IMF)-style reforms, most states’ inability to resist IMF pressures and reforms drew attention to the loss of government control and general erosion of state authority. Most illustrative was the case of Indonesia, where the failures of the state helped to transform an economic crisis into a political one, resulting in the downfall of Suharto, who had dominated Indonesian politics for more than 30 years.

Debates about the causes of the financial crisis involved competing and often polarized interpretations between those who saw the roots of the crisis as domestic and those who saw the crisis as an international affair. The economic crisis focused much attention on the role of the developmental state in East Asian development. Proponents of neoliberalism, who saw the crisis as homegrown, were quick to blame interventionist state practices, national governance arrangements, and crony capitalism for the crisis. Assistance from the IMF all came with conditions aimed at eliminating the close government-business relationships that had defined East Asian development and replacing Asian capitalism with what neoliberalists saw to be an apolitical and thus more efficient neoliberal model of development.

The early neoliberal triumphalist rhetoric, however, also gave way to a more profound reflection about neoliberal models of development. Perhaps most of all, the 1997–98 financial crisis revealed the dangers of premature financial liberalization in the absence of established regulatory regimes, the inadequacy of exchange rate regimes, the problems with IMF prescriptions, and the general absence of social safety nets in East Asia.

Echoing these concerns were those who saw the crisis as a function of systemic factors. In contrast with neoliberal theorists who focused on technical questions, however, critics of neoliberalism focused on political and power structures underlying the international political economy. Mahathir’s characterization of the financial crisis as a global conspiracy designed to bring down Asian economies represented the far extreme of these views, though his views did have some popular appeal in East Asia.

Mostly, the widely held perception that IMF prescriptions did more harm than good focused particular attention on the IMF and other global governance arrangements. The IMF was criticized for a “one size fits all” approach that uncritically reapplied prescriptions designed for Latin America to East Asia, as well as its intrusive and uncompromising conditionality. Fiscal austerity measures were criticized as especially inappropriate for the East Asian case and for prolonging and intensifying both economic and political crises. In addition to the criticism leveled at the technical merits of IMF policies, the politics of the IMF and the general lack of transparency of its decision making were also challenged. Limited East Asian representation in the IMF and World Bank underscored the powerlessness of affected economies, as well as their lack of recourse within existing global governance arrangements. Combined, the criticisms of the IMF diminished the prestige, if not the authority, of the IMF, resulting in heightened calls for a new international architecture to regulate the global economy.

The Asian financial crisis also revealed the inadequacies of regional organizations, especially the Asia-Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN), generating much debate about the future of both organizations. Criticism focused especially on the informal, nonlegalistic institutionalism of both organizations. However, though ASEAN displayed greater receptiveness to institutional reform, informal institutionalism remains the norm with respect to regional forums in East Asia.