LESSONS FROM ASIA Editorial
Monday, May 14, 2007
Ten years ago today the world's last major financial crisis began in Bangkok with speculative attacks on the Thai baht. Debate still rages about the causes of the Asian financial crisis of 1997-98, the actions of the International Monetary Fund, and about whether the right lessons have been learned.
Between 1997 and 1998 there were linked banking and currency crises in South Korea and most economies in the Association of Southeast Asian Nations. These “tiger” economies had grown fast but had maintained fixed exchange rates, which encouraged external borrowing. They also experienced dramatic asset price booms.
The crisis caused recessions that cost some countries more than 10 per cent of their real output per person. The recovery was rapid and strong, but with the exception of South Korea, many of the Asean economies are growing about 2 percentage points per annum slower than they did prior to 1997.
One explanation is that this simply reflects unsustainable pre-crisis growth, fuelled by imports of capital and too much domestic liquidity. This is clearly part of the story, but cannot account for the diversity of outcomes in the regions, from spectacular growth in China to something near stagnation in Indonesia.
Another possibility is that the financial crisis itself hit Asean particularly hard and reduced its ability to grow. But the academic evidence for such effects is limited while, in many ways, the crisis improved the Asean economies. It certainly brought better banking regulation and other structural reforms.
It now seems that the crisis of 1997 was not the cause of Asean's woes but rather a highly dramatic symptom. The export performance of the “tiger” economies deteriorated in the 1990s, leading to large current account deficits, and vulnerability to capital outflows. That was partly due to inappropriately high pegged exchange rates, but also due to China's emergence as an exporter, creating a vast new competitor with an almost limitless capacity to sell at a lower price.
That has meant a change of economic model for the tigers, away from exporting finished manufactures to advanced economies, and toward exporting commodities, components and services (such as tourism) to China. Asean can still grow, and grow fast, but there is now a speed limit. Until another generation has passed, and China itself has grown rich, export-led industrial growth will be hard for anyone to achieve. Ten years on, the meaning of the 1997 financial crisis is starting to become clear.
