Asian Financial Crisis – How to Learn From the Past

The 1997-1998 Asian Financial Crisis: How Did Asia Fall?

The great 1997 Asian Financial Crisis (AFC) affected most countries in Southeast Asia as well as other Asian countries. During the times of trouble, people in the AFC affected countries feared that the crisis would spark a global economic meltdown.

The starting point of the monetary crisis was the collapse of the Thai baht. In 1997, the Thai government’s decision of floating the Thai baht resulted in a financial collapse of the currency. While Thailand failed to maintain the value of its currency, the country’s economic condition was degrading significantly. The crisis resulted in layoffs in several sectors such as construction, real estate, and finance. Around 600,000 foreign workers and a huge number of local workers lost their jobs following the national crisis. January 1998 was Thailand’s lowest point; the baht reached its lowest rate of 56 to 1 US dollar. Meanwhile, before the crisis, the rate was 25 units to the dollar.

In Indonesia, severe financial crisis hit the country in August 1997. The government did not see this coming because in June 1997, the monetary condition of the country was at its best. The sudden crisis was triggered by numerous protests against the incumbent government. Political instability soon led to an awful financial and national security crisis. Intense devaluation started to develop in November 1997 and reached its peak in early 1998. The country lost 13.5% of its GDP in 1998 and the rate of the Indonesian rupiah plunged to 14,000 to 1 US dollar while before the crisis, 1 dollar only cost roughly 2,600 rupiah.

In South Korea, the crisis was also known as the IMF crisis. While the macroeconomic fundamentals of the national country were stable, many South Korean banks were burdened with non-performing loans in order to fund aggressive expansion of large companies. Huge establishments such as Kia Motors, Hyundai Motors, Samsung Motors, and Daewoo Motors asked for excessive loans and failed to return their debts. In 1998, Kia Motors was taken over by Hyundai Motors, Samsung Motors was liquidated, and Daewoo Motors was sold to the US-based company General Motors. At the same time, the value of the South Korean won continued to decrease. From the normal rate of 800 won to 1 US dollar, the rate decreased to 1,700 won to the dollar.

The People’s Republic of China was one of the few Asian countries that remained unaffected by the severe financial crisis. China’s renminbi (RMB) remained stable with the exchange rate of 8.3 RMB to 1 US dollar. RMB’s non-convertibility policy actually protected the currency from speculators that it helped China become one of the few Asian countries with the strongest financial stability. However, although China did not suffer from currency rate fluctuation or deficit in GDP, the AFC did slow down the growth of China’s GDP. To overcome this issue, the Chinese government soon implemented new policies to overcome the country’s financial weaknesses such as relying mostly on trade with the United States and having too many non-performing loans.

Unlike China, Japan was pressurized by the AFC but did not collapse. This is due to the fact that about 40 percent of their exports were aimed at Asian countries. Due to the crisis, most of these countries had to cut back on their imports and thus this affected Japan’s economic condition. To overcome this problem, the products that were supposed to be exported to Asian countries were sold massively, which caused the rate of the Japanese yen to fall to 147 yen to the dollar. From 1997 to 1998, Japan’s GPD continually dropped from 5% to 1.6%. Even worse, in 1998, recession occurred due to heavy competitions between manufacturers, which lead to more bankruptcies.

On the other hand, other countries in Asia such as the Philippines, Hong Kong, Malaysia, and Singapore also underwent financial crises. In general, these countries suffered from GDP deficit. While the Philippines suffered from 3 percent GDP deficit, Malaysia lost 5 percent of its GDP during the AFC.

IMF’s Confession of the Wrong Handling of the 1997 Asian Financial Crisis

During his Asian tour in February 2011, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, confessed IMF’s mistake in handling the 1997 and 1998 Asian Financial Crisis in front of the president of the Republic of Indonesia, Susilo Bambang Yudhoyono. While handling the crisis, the organization did not take into account about the differences in political and historical condition of each Asian country. As a matter of fact, those differences are significant as different issues require different handling approaches. During his speech, Strauss-Kahn said that the IMF did some things right but he also humbly admitted that “we also did things wrong, and we have to accept this”. By accepting the mistake, Strauss-Kahn also meant that the International Monetary Fund has learned a lot from the AFC.

How to Prevent the Financial Crisis from Recurring?

To avoid the AFC from recurring, Asia should learn from the past. As Asia progressively develops, competition is never static in this region. Many things have to be improved and reformed due to years of delay. For these reasons, we cannot take for granted the current momentum of Asia’s economic growth as well as the surfacing markets. Indeed Asia still relies heavily on imported goods and technology from developed countries. Yet, if economic performers in Asia are not careful enough to stick with themselves in the trade cycle, this region may experience another financial crisis.

Looking back, the AFC was triggered by various factors such as too much leverage in the corporate sector, bad credit management, and weak macro-management in handling problems like capital markets, monetary policy, and fluctuating exchange rates. Another causal factor of the crisis was governmental issue, which was also referred to as crony capitalism.

Based on Dominique Strauss-Kahn’s statement regarding IMF’s mismanagement of the Asian Financial Crisis, we can see that the large portions of advanced countries ignored the real factors which triggered the AFC from happening. Without real handling of the root problem, flawed macro-economic theory, lax fiscal policies, weak financial supervision, and insufficient monetary policy over an eagerly developing continent will be fatal.