Many years from now, when revisionist historians look back at the 1990s and try to puncture its exuberant aura, they’ll first hone in on the event we have come to know as the Asian Financial Crisis. Understandably so. Twenty years ago this July, what began as a currency crisis spread across the region and beyond. Eighteen months later it had claimed Russia as a victim and buffeted the United States and Latin America, besides wreaking devastation on several Asian economies. Its causes remain contested, even mysterious to this day. And the fear that it may repeat has never quite left us.
In the summer of 1997, Thailand became the unlikely peg on which the fate of East Asia’s tiger economies hung. Investments had been pouring into the country for years. Construction cranes criss-crossed Bangkok’s skyline as much of the foreign money was directed towards speculative real estate projects. Thailand was hardly alone in this. As Paul Krugman summarized, ‘the economies of Southeast Asia were beginning to bear a strong family resemblance to Japan’s “bubble economy” of the late 1980s.’
Many investments were the product of cosy relationships between governments and businessmen. Others were questionable gambles spurred by cheap money. As deals turned sour and companies became bankrupt, foreign investors grew queasy. ‘The loss of confidence was to a certain extent a self-reinforcing process,’ Krugman noted. ‘As the air began to go out of the bubble, losses began to mount, further reducing confidence and causing the supply of fresh loans to shrink even more.’
On July 2, Thailand’s central bank, which had until then depleted its foreign reserves trying to prop up the baht, let it float for the first time since 1983. It was the moment speculators were waiting for. Led by hedge funds, they immediately mounted a fresh wave of attacks on the baht. (The currency lost 15-20% against most currencies on the first day alone.)
Sensing similar weaknesses in other regional economies, speculators turned their attention to Malaysia, Indonesia, Singapore and the Philippines. Hedge funds were now joined by panicked investors who wanted to take their money and flee before it was too late. The crisis essentially became a bank run on an international scale.
On July 18, the IMF had to use its ‘emergency funding mechanism’ for the first time to give the Philippines a billion dollars to help defend the peso. By August 5, the IMF agreed to loan Thailand $17 billion in exchange for the usual raft of austerity measures. A little over a week later Indonesia allowed the rupiah to float freely, with ruinous consequences. By the end of October, the IMF approved a loan to the island nation that eventually amounted to $40 billion.
Observers gave the spreading panic a name: Contagion. Even as Indonesia was negotiating its bailout package, the crisis was moving north. Hong Kong, under a cloud of uncertainty after its July handover to China, was next in line. On October 23, the Hang Seng dropped more than 10%, wiping out nearly $30 billion in value. The city’s real estate bubble burst soon after, worsening its woes.
In November, a top Japanese brokerage, Sanyo Securities, filed for bankruptcy, and the tottering Hokkaido Takushoku Bank collapsed. Around the same time, South Korea’s central bank stopped propping up the country’s currency, the won, allowing it to nosedive. Within a few days the country formally required IMF assistance, a humiliating moment for the world’s 11th largest economy. On December 3, the IMF approved what was then, its largest ever assistance package, a $57 bailout for South Korea.
By the end of 1997, the Baht had fallen about 45% compared to its 1996 average, while the won had dropped nearly 54%. Indonesia’s rupiah tumbled some 57%. By July of 1998, the currency had lost 80% of its value compared to a year earlier. Throughout the region, companies and banks went out of business and hundreds of thousands were laid off. According to one estimate, a total of more than 10,000 people committed suicide in Hong Kong, Japan and South Korea. IMF-ordained austerity, whether justified or not, also took its toll. In South Korea, at least one protestor held a placard asking ‘I.M.F = I’M Fired(?)’.
Indonesia, the fourth most populous country in the world, was the worst off. Inflation spiraled out of control and the newly unemployed took to the streets to protest against the regime of ageing aristocrat, President Suharto. Riots broke out in Jakarta in May 1998, with protestors setting fire to buildings and attacking the city’s Chinese minority. Suharto resigned, but by June the World Bank estimated that the number of Indonesians subsisting on less than a dollar a day had doubled from twenty million to forty million.
Even as Indonesia was in turmoil, the crisis hit Russia, a country already in economic shambles after the Soviet collapse. By August, Russia was brought to its knees as its stock and bond markets collapsed. An IMF loan was too little too late. Russia officially defaulted on its loans that month, briefly throwing global markets into turmoil. Among the most prominent victims was the American hedge fund Long Term Capital Management, which had opened with much fanfare in 1994. By 2000, it had ceased to exist. (Two of LTCM’s founders had been awarded the Nobel Prize in economics in 1997, just as the crisis was unfolding.)
The political after effects of the crisis remain significant. After Suharto’s ouster, Indonesia painfully transitioned back to democracy. Around the time Suharto stepped down, South Korea elected a new president, Kim Dae-jung. Malaysia’s prime minister Mahatir Mohammad sacked his increasingly popular deputy Anwar Ibrahim in September. Thailand entered a long period of political upheavals, which has so far included two military coups. And in August of 1999, Russia’s ailing president, Boris Yeltsin, appointed a little-known St Petersburg politician named Vladimir Putin as his prime minister.
During a summit in 1996, Mahatir Mohammad had said ‘Asian values are universal values. European values are European values.’ Though loosely defined, one of the proponents of ‘Asian values’ described them as ‘attachment to the family as an institution, deference to societal interests, thrift, conservatism in social mores, respect for authority’. When crisis first broke out in July 1997, there was much schadenfreude in the West, though the gloaters got their comeuppance a decade later in an American-led recession that left East Asia relatively unscathed.
Mohammad could claim some vindication for how he handled the crisis: By refusing to let the ringgit float freely he avoided the currency crashes and soaring inflation of Indonesia and Thailand. But neither his country, not Thailand nor Indonesia have since done much to restructure their economies. Their era of rapid economic growth is long gone, and all three seem to be stuck in a classic middle-income trap.
While the region’s economies seem to have learnt from the crisis of 1997-98, new variants of the old threats may be emerging. In 2014, a clutch of economists warned that foreign affiliates of a company could transmit back their external borrowings in ways that ‘could give rise to financial stability concerns.’
There’s also widespread anxiety over China. As columnist William Pesek recently noted, the drivers of Chinese growth ‘are tantalisingly familiar’ to those of 1997. These include ‘explosions in debt, credit and unproductive investments; chronic overcapacity; quantity of growth trumping quality; a sprawling shadow-banking machine; surging non-performing-loan ratios; policymakers drawing down currency reserves; regulators prodding domestic companies to go public before their time; and complacency among markets about how fast things could go awry. Beijing is treating the symptoms of its excess, not the root causes, in ways that are feeding ever-bigger bubbles.’
In short, the bacillus of 1997 may never have disappeared- it may have simply have mutated. Contagion might yet return.