For many in Asia, those turbulent, violent times of 1997-1998 remain too painful for recollection or analysis. A region which once prided itself on seemingly endless economic growth and political stability, a virtuous combination to be sure, was brought to its knees, leading many to question the very existence of the Asian miracle”. Yet, while there is clearly an argument to be made that the ‘miracle” was flawed, such flaws eventually being brought to light and the result being the ensuing crash, or indeed that higher inputs (i.e. investment) will inevitably lead to higher output (growth). Equally inevitably, it will lead to increasingly diminishing returns and a crash if not accompanied by higher productivity. Yet, despite the merits of this argument, it does not of itself explain why Asia massively outperformed the African and Latin American regions during the 1980s and the half of the 1990s. Asian countries such as Indonesia did not suddenly become corrupt in 1997. They were so long before, yet unlike in the case of Africa, in some countries in Latin America or Russia corruption did not act as a hindrance on growth for quite some time - and by that I mean over a decade. Why the difference? Some of the same domestic factors which eventually brought down the region were behind its growth phase, namely the interconnectedness of local companies, banks and politicians, emphasis on networking rather than on individual aspirations and a focus on top line development (sales, in other words) and market share. Yes, growth was boosted substantially by investment without producing sufficient productivity gains to offset either real or financial asset inflation (thus leading to a decline in real returns), but that growth did not happen everywhere. It did happen in Asia and at least partly because of some of Asia’s long-term fundamental strengths, as well as it weaknesses. In that sense, there was an Asian “miracle”, but that “miracle” was not indefinite, its time would come to an end, albeit spectacularly so, as indeed many boom periods do. Indeed, for every boom, there is usually a bust. Looked at in a long-term historical context, the Asian crash of 1997-1998 could be seen as merely an evolutionary step in the region’s economic development, a step which Asia’s more “emerged” counterparts have periodically seen on a number of occasions.
Though many have sought to compare the Asian crisis to past crises in the emerged world, notably the Latin American debt crisis of the 1980s, I would suggest that this is a useless exercise. Whatever the appropriate comparison - if indeed there is an appropriate comparison which can be made - going forward what matters is not the past but the specific responses at this time of the Asian countries to their financial and economic situations. At least initially, there was a wide variety of responses to the crisis, varying from acceptance to recrimination at cries of revenge at the verbal level. Enemies were sought and easily found, but whatever the truth or not of the charges levelled against the speculators - and it is the contention of this book that the vast majority of these charges were ill-informed, nonsense at the very least and cynical political expediency at a more realistic level
- the damage continued to be done to the Asian financial markets and economies alike in the second half of 1997 and the first half of 1998.
With several countries running out of reserves with which to defend their currencies or to provide adequate funding for their combined fiscal and current account gaps, they turned one by one, albeit grudgingly to the IMF for economic aid. Such aid did not come without strings attached. Fiscal and monetary policies were to be tightened significantly in order to stabilise the domestic currency and reduce the external imbalance and the concept of market intervention was discouraged in favour of seeking appropriate medium-term policy settings. In 1998, the IMF did somewhat of an about-face and allowed those countries which had aid programmes - Thailand, Korea, Indonesia and the Philippines - to loosen policy settings in order to alleviate somewhat the effects of previously tight policies on the domestic economy. Going forward, while the likes of Thailand is now emerging from the IMF programme, no longer needing to fund itself through external, multilateral sources, the influence of both the IMF and the World Bank remain extremely profound on region-wide policy. Indeed, any examination of how Asian countries sought to cope with the initial stages of the crisis and how they are presently striving to secure economic recovery would prove fruitless without an analysis of the role of these organisations,
most notably that of the IMF.
To put it mildly, the past three years have been trying times for ‘the Fund” as it is widely known. In not a single instance where the Fund went in to provide financial aid for an Asian economy did the local currency not devalue afterward - and usually in a spectacular fashion. The IMP’s emphasis on tight fiscal and monetary policies was roundly condemned, notably by Harvard’s Jeffrey Sachs - an unloved figure within the corridors of the Fund - but also by such luminaries as World Bank chief economist Joseph Stiglitz, resulting in an ongoing spat between the two organisations. High drama indeed, though this un-edifying spectacle of the world’s two leading multilateral organisations feuding over how to deal with the Asian crisis did not play well with those most immediately involved with the worst effects of the crisis in Asia itself. Either with or without the efforts or such organisations, Asian countries went about their way, trying initially to limit the damage and then to provide some support for stabilisation and then recovery. What ensued is a remarkable story, of some that followed the IMF medicine to the letter and now appear to be emerging from the other side, albeit in frail shape, of others that refused the medicine and took the “nuclear” option of adopting capital and exchange controls, of still others where truly brilliant economic leadership super-ceded any need to seek external help. How Asia coped and is coping is the focus of the next chapter.
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