Ten Years aFTer: Revisiting the AsiAn FinAnciAl cRisis

The Asian financial crisis of 1997-98 is now seen as one of the most significant economic events in recent world history. The crisis began in early July 1997, when the Thai baht was floated, and spread into a virulent contagion—leaping from Thailand to South Korea, Indonesia, the Philippines, and Malaysia. It led to severe currency depreciations and an economic recession that threatened to erase decades of economic progress for the affected East and Southeast Asian nations. The sequence of events triggered a self-reinforcing spiral of panic, which many analysts argue was premised on a confluence of the inherent volatility of financial globalization and the weak domestic financial systems in East Asia. Financial liberalization in the region led to surges in capital flows to domestic banks and firms, which expanded bank lending, ultimately resulting in a rapid accumulation of foreign debt that exceeded the value of foreign exchange reserves. As international speculation on dwindling foreign reserves mounted, the regional currencies came under attack. During the summer of 1997, Thailand sharply reduced its liquid foreign exchange reserves in a desperate attempt to defend its currency. When the Thai baht was cut loose from its dollar peg, regional currencies plunged in value, causing foreign debts to skyrocket and igniting a full-blown crisis.1 By mid-January 1998, the currencies of Indonesia, Thailand, South Korea, the Philippines, and Malaysia had lost half of their pre-crisis values in terms of the U.S. dollar. Thailand's baht lost 52 percent of its value against the dollar, while the Indonesian rupiah lost 84 percent. During the last stages of the Asian crisis, the regional "financial tsunami" generated a global one as Russia experienced a financial crisis in 1998, Brazil in 1999, and Argentina and Turkey in 2001.

The various participants in the Asian crisis ranged from Wall Street to Jakarta. Asian and Western governments, the private sector, and the International Monetary Fund (IMF, or the Fund), established to provide temporary financial assistance to help countries ease balance of payments adjustments, all played crucial roles in the sequence of the crisis. Perhaps the most controversial role was that of the IMF. Its critics argue that the stringent monetary policies and financial sector reforms attached to the Fund's loan programs exacerbated the crisis, while its supporters maintain that those very policies helped to dampen the effects of the crisis. Governments, banks, and firms in the crisis-affected countries were charged with "fundamental weaknesses," in that a lack of transparency and regulatory oversight in domestic financial systems and institutions was at the roots of the crisis. The international market was seen to have acted in panic, as a "herding" effect prompted a massive capital outflow from the East Asian countries. The resulting economic recession shocked the world with its staggering economic and social costs. Over a million people in Thailand and approximately 21 million in Indonesia found themselves impoverished in just a few weeks, as personal savings and assets were devalued to a fraction of their pre-crisis worth. As firms went bankrupt and layoffs ensued, millions lost their jobs. Soaring inflation raised the cost of basic necessities. Strapped fiscal budgets imposed a financial squeeze on social programs, and the absence of adequate social safety nets led to grim economic displacement. Poverty and income inequality across the region intensified, as a substantial portion of the gains in living standards that had been accumulated through several decades of sustained growth evaporated in one year download