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But plunging currencies and stockmarkets have put the economic miracle in the deep freeze, and minds are now concentrated simply on survival. These countries' foreign-debt burdens have therefore swollen alarmingly in local-currency terms.

Will the Next Global Financial Crisis Begin in the Developing World?

The financial crisis might seem to be over: currencies have steadied and stockmarkets are recovering. But the economic crisis has barely begun.

In the Chinese calendar is the year of the tiger, but in the region it is looking more like the year of the slug. Indonesia, South Korea and Thailand will suffer outright recessions as high interest rates choke investment and consumption. And until the mess in East Asian banking systems has been cleaned up, new lending will be severely curbed, so in many of these economies GDP growth may remain weak until at the earliest. Asians feel shocked and humiliated.

Gone are the self-confident claims about the superiority of Asian values.

Asia’s financial crisis still has five things to teach us now

In South Korea and Thailand the government has encouraged people to hand over their gold jewellery for melting down to boost the country's foreign reserves. In Bangkok former high-fliers have been reduced to selling their Mercedes and designer clothes in secondhand sales. The Asian miracle, they say, was always a sham: rapid growth depended on governments pouring cheap credit into favoured firms.

The cosy relationship between governments, banks and firms insulated business from market forces, encouraging excessive borrowing and a wasteful use of resources. Doomsayers now predict a decade of lost growth in East Asia, like the one that Latin America went through after its debt crisis in the early s. To express certainty about the future is always foolish, but such gloom looks premature.

Provided that the East Asian governments take sensible measures, these economies can return to strong growth. Indeed, the tigers are, to a large extent, victims of their own success.

Years of breathtaking growth attracted vast inflows of foreign capital in the s. Rapid growth also concealed structural weaknesses such as inadequate bank regulation, a lack of transparency in business and endemic cronyism, which made a dangerous mixture with the excessive borrowing. And so many years of unmitigated success inevitably encouraged complacency, so that governments were slow to act when the first signs of trouble emerged.


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All this makes East Asia's crisis another and particularly serious example of the financial instability which often afflicts economies in the early stages of development. Economic growth never proceeds in a straight line. Moreover, contrary to popular wisdom, the East Asian tigers have been in trouble before.


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Taiwan had a banking crisis in Each time the future looked grim, but the economies concerned eventually bounced back. There is every chance that they will do so again, but it may take longer than before, for three reasons. First, in contrast to previous occasions, the tigers have all caught a chill at the same time. Since they do a large proportion of their trade with each other, that will magnify their problems.

Second, thanks to international capital liberalisation these economies now have much higher levels of foreign debt than a decade ago. And third, and most worrying, whereas in the past governments were fairly adept at handling a crisis, economic policymaking in many countries has become more politicised, and therefore less effective. Governments have also been slow to admit that their policies were flawed. Mahathir Mohamad, Malaysia's prime minister, denounced foreign speculators as criminals and morons, and criticism almost everywhere was discouraged, sometimes quite forcefully.

Last year the research boss of a foreign bank in Thailand, who had issued a critical economic report, was sent the severed head of a dog through the post. The gloom in East Asia is likely to deepen in the months ahead as more firms and banks go bust and unemployment and inflation rise.

The most worrying country is Indonesia, where fears of food shortages and hyperinflation have triggered panic buying and some bloody riots in provincial towns. Indonesia has the worst economic problems in the region, yet its government's response has been the least convincing by far. The economic crisis is now being compounded by a political one. While the economy grew in leaps and bounds, voters tolerated corrupt politicians and authoritarian rule, but if the economic goods are no longer being delivered, they could become much less accommodating.

In South Korea and Thailand, the new pressures have already produced a change of government. The most serious risk is that deep recession could lead to widespread ethnic violence and a breakdown of social and political order. It could also provoke a backlash against globalisation and a general resentment of westerners. If, on the other hand, governments implement the reforms urged by the IMF to restructure their financial sectors, and start to deal with the weak spots in their economies—such as inadequate bank regulation, too much government intervention, corruption and the lack of transparency—then strong growth can and probably will return.

The East Asian economies still retain some important economic advantages over other parts of the world, notably their high savings rates and their openness to trade, which continue despite their financial troubles. However, the crisis has exposed deep flaws in the way their savings are invested, often for political or personal favour rather than maximum rates of return. Such policies contributed to the crisis, and if left in place would harm long-term growth.

In the meantime, countries like those in Africa that really need the capital from East Asia get very little of these reserves since they are not considered creditworthy. Governments recall the crisis as a one-two-three punch delivered by the IMF. First, the Fund, along with the U. Treasury Department, pushed them to liberalize their capital accounts, which resulted in the easy exit of foreign capital that brought down their currencies.

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Asia’s financial crisis still has five things to teach us now

Then, the IMF provided them with multibillion dollar loans, not to rescue their economies but to rescue foreign creditors. Then, as their economies wobbled, the Fund told them to adopt pro-cyclical expenditure-cutting policies that accelerated their plunge into deep recession. Indonesia has said it will pay off all its debts to the IMF by The Philippines has refrained from contracting new loans from the Fund, while Malaysia defied it by imposing capital controls at the height of the crisis. Ironically, then, the IMF has become one of the key victims of the debacle.

This arrogant institution of some 1, elite economists never recovered from the severe crisis of legitimacy and credibility that overtook it -- a crisis that was deepened by the bankruptcy of its star pupil Argentina in This boycott by its biggest borrowers has translated into a budget crisis for the IMF.

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This succession of events has left the IMF with scarcely any influence among the big developing countries. But the unraveling of the authority and power of the IMF is due not only to the resistance to further Fund intervention by developing countries. Neoliberalism Rejected: Thailand It is not only the IMF but neoliberalism, the dominant ideology of the s, that came crashing down in the aftermath of the Asian financial crisis.

Malaysia imposed capital controls and stabilized the economy, allowing it to weather the recession in better than other afflicted countries.

Asia’s financial crisis still has five things to teach us now

It was, however, Thailand that most dramatically broke with neoliberalism. The Thai government froze repayments on rural debt, instituted government-financed universal health care, and gave each village one million baht to spend on a special project. The financial crisis, which saw one million Thais drop below the poverty line in a few short weeks, turned the populace against neoliberal globalization.

Even as the government refocused on stimulating domestic demand through income support for the lower classes in the countryside and the city, popular sentiment went against free trade. Whatever the case, globalization is an unpopular word in Thailand today. It undertook radical labor market restructuring, trade liberalization, and investment liberalization. Even after the breathtaking moments were over, most of the major firms continued to undertake organizational and technological restructuring in an employment minimizing manner, and thereby got reborn as globally competitive exporters.

The Gini coefficient that measures inequality jumped from 0. Social solidarity is unraveling, with emigration, family desertion, and divorce rising alarmingly, along with the skyrocketing suicide rate. The suicide of a successful South Korean actress brought the spiraling suicide rate to public attention in All Fall Down Although the Asian financial crisis of may have brought about the downfall of the IMF, economist Jayati Ghosh points out that it also marked the demise of the East Asian developmental state.

This developmental state had aggressively managed the integration of the national economy into the world economy so that it would be strengthened, not marginalized by global economic forces. Despite their different pathways from the crisis, the economies of East Asia have been irrevocably scarred and weakened. The crisis marked the end of their being at the forefront of development, as models to be emulated.

The 21st century that was supposed to be their century slipped away. The cataclysm marked the passing of the torch to China.