The IMF hoped that their loan packages would restore confidence long enough so that companies, banks and finical institutions could get their houses in order. But confidence was not restored and stock markets and currency continued to decline. In many ways the IMF terms were too harsh. They caused great hardships and were politically disastrous and in some cases delayed the recovery.

Foreign bargain hunters bought up Asian factories and businesses. Wall Street investors who pulled their money out of Asia, causing the crisis, were among the first to return to snatch up under-valued enterprises.

One of the guiding principals after the Asian financial crisis was to wait it out as long a possible and be rescued by rebounding markets. After a while, currencies stabilized, interest rates dropped to historic lows, share prices recovered somewhat, credit ratings were improved, inefficient companies and wasteful banks had the supports taken away and closed. By 1999, consumer confidence began improving and people began buying stuff and their spending helped lift the economies. The stock markets rose, inflation came down and interest rates fell.

Janet L. Yellen wrote in Global Economic Viewpoint: “With their economies at such a low ebb after the crash, the expectations that the Asia crisis nations would stage a full and fast recovery were, frankly, not very high. Yet, remarkably, a full and fast recovery is exactly what happened. Between 1999 and 2005, these nations enjoyed average per capita income growth of 8.2 percent and investment growth averaging nearly 9 percent, with foreign direct investment booming at an average annual rate of 17.5 percent. Moreover, all of the loans associated with the International Monetary Fund’s assistance programs during the crisis have been paid back and the terms of those programs have been fulfilled. [Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

Janadas Devan wrote in The Strait Times, “It was not an accident that the two Asian countries least affected by the crisis, China and India, were also the ones that had not liberalised their capital markets. And among the countries that had liberalised, it was not an accident that the country that weathered the storm best, Singapore, was also the one with the best-developed regulatory systems. [Janadas Devan, The Strait Times, July 3, 2007]

Reforms Made After the Asian Financial Crisis in 1997-98

Janet L. Yellen wrote in Global Economic Viewpoint: “At least part of this success is likely due to policy changes that have gone some way toward addressing the vulnerabilities” that caused the crisis. “One such policy change has been an increasing shift away from targeting exchange rates and toward targeting an explicit desired inflation rate. South Korea moved in this direction in 1998, followed by Thailand in 2000 and Indonesia in 2005. Changing the anchor for these countries’ monetary and foreign exchange policies has helped to mitigate the possibility of currency mismatches by encouraging private investors to hedge their currency positions, while also allowing for greater domestic flexibility in response to external shocks. [Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

“The more typical way for these countries to limit exchange rate movements has been through intervention and the accumulation of dollar reserves. As a result, between 1997 and 2005, foreign exchange holdings in the five crisis countries quadrupled to over $378 billion. While efforts to limit exchange rate appreciation may be motivated in part by competitiveness considerations, this build-up in reserves may also be motivated by memories of the crisis, as these funds could be used to smooth the effects if another “sudden stop” occurred. [Ibid]

“In any event, it is fair to say that the East Asian nations as a group have come a long way toward achieving exchange rate flexibility and price stability compared to where they were in the 1990s, and the improved macroeconomic conditions likely have played a role in their superior performance and in their renewed attractiveness as destinations for foreign direct investment. [Ibid]

“South Korea, Malaysia, Thailand and Indonesia have also moved to improve banking supervision and regulation and to introduce more market discipline since the crisis. South Korean commercial banks, for example, have adopted Western-style board governance systems, where the majority of board members are outside directors, and they have reformed their executive compensation processes, with banks introducing or strengthening executive stock option programs geared toward tying compensation more closely to bank performance. South Korean banks also quickly cleansed their balance sheets of non-performing loans. [Ibid]

“Among the other crisis nations, supervision and accounting transparency also have improved, and banks in Thailand, Malaysia and the Philippines have succeeded in ridding their balance sheets of non-performing loans. Malaysian banks’ new emphasis on lending to consumers and small and medium-sized enterprises has moved them away from relationship-based lending that was the norm prior to the crisis. Thailand has brought its previously unregulated finance companies under central bank supervision. [Ibid]

“Another step toward decreasing the extent of bank-centered finance and the scope of implicit government guarantees on investment has been the development of local currency bond markets. Prices in these markets adjust to changes in perceived risk automatically and in ways that can pose substantially less systemic risk than foreign-currency-denominated short-term loans. [Ibid]

“This solution complements the other reforms, because, in order to function well, bond markets require timely, honest and credible reporting of firms’ financial circumstances---in other words, a transparent, well-regulated and well-functioning set of capital markets. Thus, borrowing in bonds from a large number of creditors could reduce the relationship lending problems believed to have played a role in poor lending decisions made by Asian banks before the crisis. [Ibid]

Lessons Learned from the Asian Financial Crisis in 1997-98

Janet L. Yellen wrote in Global Economic Viewpoint: “Some lessons have clearly been learned. One relates to the conditions for opening a country’s capital markets. With a strong financial system, the arguments in favor of unfettered capital flows are strong. But during a transition from a financial system with evident vulnerabilities, the path to the liberalization of capital markets should be gradual and carefully managed.[Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

“Another lesson is that adjustment programs by the International Monetary Fund should be tailored to individual nations’ characteristics. For example, some critics have charged that while the austerity measures it advocated may have worked well in other financial crises, in the case of Asia they may have actually exacerbated the downturn. Although that claim remains controversial, the IMF has adopted new guidelines to ensure that its adjustment programs are shaped by individual country characteristics and that local authorities have a voice in steering adjustment policies during IMF-supported lending programs going forward. A third lesson is that transparency concerning both overall macroeconomic conditions and individual firm accounting is needed to guide successful domestic investment decisions. [Ibid]

“In conclusion, the crisis illuminated the importance of sound financial policies, including strong accounting principles and adequate regulatory oversight, as well as the importance of sound macroeconomic policies, including exchange rate flexibility. The good news is that, since the crisis, the Asian countries as a group have made great progress in these areas. Still, there are reasons to believe that continued vigilance will be required to prevent or ameliorate crises in the future. [Ibid]

“There is some risk that the policy reforms that were achieved in the wake of the disastrous crisis could be scaled back in the current era of relative regional prosperity. Further, private investors may respond to the relatively tranquil current economic environment by dropping some of the prudent investment practices that were adopted following the crisis. The best way to avert another such crisis in the future is to review the fundamental causes of the 1997 crisis and heed the lessons yielded on the path to recovery. We must also remain vigilantly aware of any current vulnerabilities that could undermine the stability of the global financial system that links us all to East Asia. [Ibid]

China and the Legacy of the Asian Financial Crisis in 1997-98

Janet L. Yellen wrote in Global Economic Viewpoint: In assessing financial conditions in Asia ten years after the financial crisis, one must consider the ascendance of China as a key economic power in the region. China stood apart from the crisis a decade ago because it differed from the crisis countries in two important respects. First, its capital account was more closed, and second, much of the foreign investment was not short-term loans but direct investment, which in many cases involved actual plants and factories---“steel in the ground.” [Source: Janet L. Yellen, Global Economic Viewpoint, February 27, 2007]

“Today, despite China’s recent successes, it still shares some of the vulnerabilities faced by the Asia crisis countries in the 1990s. For example, although it has made significant progress in reforming its banking sector through reducing non-performing loans, the government still has a degree of influence in Chinese bank lending decisions, and some have expressed continuing concern over the health of the banking sector. [Ibid]

“While China has increased the flexibility of the renminbi, permitting it to appreciate by 6.5 percent against the dollar since it was officially unpegged in July 2005, it is still much less flexible than the currencies of the Asia crisis countries. The central bank has resisted pressures for more rapid appreciation of the renminbi by intervening in the foreign exchange market and building up its holdings of foreign reserves. Limiting appreciation of the currency in this manner complicates the use of monetary policy to produce an orderly slowdown in China’s currently booming economy. [Ibid]

Reforms after the Asian Financial Crisis in 1997-98 in Thailand

After the 1997-1998 Asian financial crisis in Thailand the currency floated freely, reserves of foreign currency increased, mostly by exporting to the United States, and the practice of borrowing from abroad in the short term has been curtailed. The government closed or seized two thirds of Thailand’s financial houses and seized or forced the sale of most of its 15 major commercial banks. Thailand created bankruptcy court in 1999. The process was slowed by politicians who also headed some of Thailand's largest companies.

The decline in the value of the baht increased exports, deterred foreign spending, attracted foreign investors and tourists. Among those who found new business opportunities created by the crisis were debt collectors. Overall there was less damage to the economy than in Indonesia and the Philippines.

In 1999, exports were flat as a result of the Asia-wide recession. The government was slow to developed a strategy to revive the economy. Cronyism continued to live on in Thailand. The number of non-performing loans was still high (46 percent) in 2000. The recovery was delayed in the early 2000s by the crash, September 11th, and SARS.

After the Asian Financial Crisis in 1997-98 in Thailand

Many Thais felt the whole crisis was created by foreigner to get their hands on valuable Thai assets at cheap prices. In March 1999, Peter Brimble, a longtime analyst in Bangkok, told the New York Times, "There is a new feeling out there that foreigners are trying to take over Thailand on the cheap." American fiancier George Soros canceled a speech in Bangkok after business people there threatened to pelt him with rotten eggs and fruit.

Thailand was unable to compete on the cheap labor front against countries like China, Vietnam and India. Matsushita was one company that cut its production facilities in Thailand and shifted jobs to China.

Rather than following the Japanese, Korean and Chinese models of developing mass production and acting as a subcontractor for more developed nations, Thailand began focusing on developing promising home grown sectors such as processed food, textiles with the intent of nurturing domestic demands as well as imports. There was also an effort to decentralize and move more jobs to the countryside.

Thailand has not demanded technology transfers as has been the case in China and South Korea. Local companies burden by debt were not anxious invest in improved technology and research and development. A plan was introduced to form a Southeast Asia wide fund---with each country contributing about 1 percent of their foreign exchange reserves---to avoid a financial crisis like the one in 1997. This became the Chiang Mai Initiative (See Below).

After the Asian Financial Crisis in 1997-98 in Hong Kong

In Hong Kong the Asian Financial Crisis set in motion a chain of events that continued long after the crisis was over. Real estate price continued to drop. Many people found themselves holding mortgages for properties that were worth two thirds what they were when the mortgages was takem out. Nobody wanted to buy. Some developers offered Mercedes to anyone willing purchase a property.

Speculators attacked the Hong Kong currency. Hong Kong fought off the attacks but did so at a heavy cost. Interest rates rose very high, which hurt struggling companies and the property market. A deflationary spiral tied to a drop in real estate market brought some relief to consumers but put pressure on companies and banks.

Growth and other economic figures went up and down. In 2000 growth reached 10.5 percent. It dropped to 3 percent in 2001. Consumer prices fell 3 percent in 2002. Unemployment rose to 8.7 percent o the heels of the SARS outbreak in 2003. Efforts to establish a high tech center were largely unsuccessful.

If anything the crisis strengthened the position of the tycoons by eliminating competition. Many analysts and observers felt this was dooming Hong Kong, which had traditionally thrived on competition stirred by many companies competing against one another. Instead Hong Kong became a territory dominated by oligopolies with friendly relations with the government.

Deflation was a blessing in disguise for many businesses, particularly retailers and some service industries.. With lower rents they could charge lower process and become competitive. Unemployment forces bankers to become fortunetellers and office workers to become taxi drivers. A special barter fair was set up so really hard up people could trade stuff for a ride.

After the Economic Crisis in 1997-98 in South Korea

In South Korea the economy was given a push immediately after the crisis due the devaluation of the won and increased demand for things like South Korean steel. Low stock prices meant there were bargains to be had. Foreign investment increased tenfold in the first six months of 1998. In 1999 hedge funds, Intel and George Soros returned. Standard and Poor upgraded South Korean bond to above junk bond status.

The feeling in the late 1990s, was that companies did as much they were forced---letting in Western investors and allowing minority shareholders rights---but failed to make deeper reforms and did their best to maintain their old ways of lending, pricing and fending off competition.

There were ups and downs. The South Korean stock market rebounded 50 percent by August 1999. In 2000, the stock market crashed 51 percent over worries about bankruptcies and corporate debt, which reached $630 billion, sa taggering 150 percent of GDP.

South Korea did much better in getting back on the road to recover and spurring growth than Japan did which reluctant and slow to make structural reforms. The economy steadily recovered. Consumer spending, banking reform and corporate restructuring helped spur country growth. Bu 2002, South Korea had paid back a $20 billion loan to the IMF and had $108 billion in foreign reserves

In the early 2000s, cutting edge high tech and IT oriented businesses were emerging as the economy was still being bogged down by chaebol debts. In the summer of 2003, South Korea slipped into a recession, caused in part by growing debt of consumers and appreciation of the won, which made South Korean products more expensive for overseas customers to buy

After the Asian Financial Crisis in Indonesia

After the Asian Financial Crisis, Indonesia's problems continued. Economic growth plummeted, the currency stayed low. There was high inflation, soaring poverty, mass unemployment and social unrest. To keep pace with rising inflation, employers had to raise wages. This forced some companies to lay off workers and foreign companies to flee to where labor costs were lower.

Money and wealth began flowing out of Java. In 1999, 23 of the 31 largest companies in Indonesia were based off of Java. At the end of the Suharto era, before the crisis, only nine were. Monopolies, cartels and debt-ridden banks and factories owned by Suharto cronies and family members were allowed to close and a new economy driven by small entrepreneurs rose up to take its place.

Some of the first sectors to recover were based on exports that were boosted by the loss in value of he rupiah. These included paper, palm oil, rubber, cacao, sugar and minerals. Economist Albert Fishlow told the New York Times, "Indonesia needs to go back to the roots of its success, using cheap, abundant labor to power a fresh export boom."

The number of people living under the poverty line doubled during the Asian Financial Crisis but returned to pre-cris levels as the government stabilized the economy. But still life was hard. Many poor families used 60 percent of their income to buy rice. The removal of subsidies on things like kerosene, gasoline and food stuffs made many basic things unaffordable. Inflation after the Asian economic crisis was particularly hard on the poor. The price of kerosene, which they rely on for cooking, rose 2½ times between 1998 and 2003 and diesel, used to transport food stuffs and other goods rose five times.

Many farmers ultimately lost their farms and were forced to move to the cities. They lived reasonably comfortable lives before the crisis. Afterwards life was hard and the recovery for them was slow and painful. One family described by the Washington Post lost their tobacco farm and ended up living under a highway in a Jakarta slum and lived off about $8 a day earned by selling meatball stew served from a pushcart.

Chiang Mai Initiative and Measures Taken to Prevent Another Financial Crisis

Many nations stockpiled foreign exchange reserves to defend against currency attacks and signed bilateral currency swap agreements to help each other out in the event a currency crisis hits one nation.

The Chiang Mai Initiative, launched in 2000 and recognized by ASEAN plus Three (ASEAN countries plus Japan, China and South Korea), is a currency swap agreement designed to provide emergency dollar funds to member countries hit by a financial crisis. Set up based on lessons learned after the 1997-98 financial crisis, it is intended to serve as an Asian International Monetary Fund.

Under the scheme participating nations would pool a portion of their foreign reserves, which they could use to prop up their currencies, for example, if they came under attack from speculators or suffered some other kind of currency or economic crisis.

In 2012, the fund was doubled in size to $240 billion to help member countries deal with the European financial crisis. For a country to receive a loan that loan must be approved by at least two-thirds of member country voting rights (Japan and China have the largest voting rights of about 28 percent).

Deng Reforms and China’s Rise

See Separate Article Under, China, Modern History

Image Sources: Wikimedia Commons

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.

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© 2008 Jeffrey Hays

Last updated November 2012

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