Asian Financial Crisis

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The Asian financial crisis in the late 1990s had its roots in private sector borrowing. In years recent to that time, most of the afflicted countries ran budget surpluses or small budget deficits while private sector borrowing increased heavily, especially short-term and from abroad. For example, loans to Thai corporations from international banks doubled from 1988 to 1994. By 1997, Thai foreign debt stood at $89 billionfourfifths of the amount owed by private corporations. Most disturbingly, one-half of Thailand's debt was short-term, falling due all within one year.

The Asian economies collapsed when their export boom came to a halt and their short-term loans came due. In 1996 Thai exports stagnated because of a decline in demand from First World countries, especially from recession-ridden Japan. Also, opening domestic markets to outside money (under an early round of pressure from the International Monetary Fund) brought a deluge of short-term foreign investment and spurred heavy short-term borrowing from abroad, fueling a building boom. By the mid-1990s, speculative investments in everything from high-rise office towers to golf courses accounted for nearly 40 percent of growth in Thailand.

Thailand's bubble was not the only one to burst, for in 1998, the entire region endured a painful and extended drying-out process. Southeast Asian exports, from autos to computer chips, from steel to textiles, glutted international markets. The crisis was made worse by intensifying competition from Chinese exports. Foreign financial capital fled; domestic spending collapsed; banks failed at an unprecedented rate, and unemployment climbed. Suffering increased as large numbers of people across the region fell into poverty.

Most economists agreed that the Asian capital markets failed in three critical ways. First, there was too much capital. Lured by the prospect of continued double-digit growth, investors continued to put money into uncertain markets in spite of the widespread financial instability. Second, the capital markets and the banking system could not channel these funds into productive uses. Too much money went into real estate, and too little went into productive investments likely to sustain the export boom. Third, there was no commitment. Too much capital rushed out too quickly. The excessive inflow of capital reversed itself at the first sign of trouble and fled with little regard for the actual strength of a particular economy.

As the 1990s drew to a close, most financial conservatives argued that international markets were stable, if subject to periodic excesses. These excesses could be traced back to a misguided interference in market economy. Conservatives believed the problem varied with the situation: industrial policy, crony capitalism (political connections guiding private sector investment decisions), or fixed exchange rates. But in each case, conservatives contended that the economies of Southeast Asia ran into trouble because non-market forces had a hand in allocating credit and economic resources better left to the financiers. Their solution was to end the non-market allocations of resources. Alan Greenspan (1926), the chair of the U.S. Federal Reserve, concluded the Asian crisis would root out "the last vestiges" of artificially inflated and poorly managed markets and will ultimately be regarded as a milestone in the triumph of market capitalism.

Liberals disagreed. They contended that none of the leading economies of the region relied on government-managed industrial policies to direct economic growth. They maintained that crony capitalism was a constant, not a new element in the Southeast Asian economic mix; that it was just as present in the boom as it was in the crisis; and that there was no evidence that cronyism was responsible for turning investment in its speculative direction. They also contended that there was no reason to believe that greater transparency in financial transactions would have done anything to extinguish the speculative frenzy. For liberals, the root cause for the economic crisis of Southeast Asia, which threatened the onslaught of a worldwide depression, was the abrupt reversal of the excessively fast rise of capital inflows and the falling global demand for the exports from that region.

Liberals insisted that some sort of public policy that regulates capital, whatever its national origins, is most needed in Southeast Asia. They believed that only regulation demanding genuine accountability from both the cronies and the capitalists offered the prospect of genuine reform. They conceded that the crunch of economic losses and slack labor markets made reform more difficult. But they maintained that as long as the myth of infallible markets was punctured, movements organized, and the opposition to free markets was strengthened, the Asian financial crisis offered the opportunity and the potential to regulate capital.

Surprisingly, the U.S. economy survived the crisis and remained relatively unharmed by it, despite significant drops in exports to Japan, South Korea, Thailand, and Indonesia. Economists pointed to three important factors contributing to the strength of the American economy. First, the Federal Reserve remained relatively passive during the crisis, which helped produce large gains in residential construction and commercial real estate. Second, the resiliency of the U.S. equity market boosted foreign demand for U.S. financial assets. Third, the fall of global commodity prices and U.S. import prices helped boost consumer real income in the United States by lowering inflation.

See also: Capital, Exchange Rates, International Monetary Fund, Recession, Speculation, Unemployment


Bosworth, Barry. "The Asian Financial Crisis: What Happened and What Can We Learn from It." Brookings Review, Summer 1998.

Hale, David D. "Dodging the BulletThis Time: The Asian Crisis and U.S. Economic Growth During 1998." Brookings Review, Summer 1998.

Lincoln, Edward J. "End of the Miracle: Exploring the Asian Financial Crisis." Brookings Review, Summer 1998.

Parker, Stephen. "Out of the Ashes? Southeast Asia's Struggle Through Crisis." Brookings Review, Summer 1998.

Sivy, Michael. "Will Asia's Financial Crisis Sink the U.S. Stock Market?" Money, July 1998.