[Jun. 22, 2007]

Ten years ago a financial turmoil shocked Asian economy. The so called Asian Tigers (Thailand, Indonesia, South Korea and Hong Kong), after having experienced from the early 1990s a high GDP growth, went into one of the most powerful financial crisis in recent history.

In '90s, Asia faced an increasing degree of foreign direct and portfolio investments, due to strong deregulation, moving from highly nationalized economies to liberalized markets.

Moreover, new institutions were developed, such as the Bangkok International Banking Facility (BIBF), designed to offer new financial services and attract investment.

But what happened in July 1997?
The crisis burst on July 2nd, when massive capital flight caused the force down of the overvalued Thai bath (Thailand’s currency). The currencies of Malaysia, Indonesia and the Philippines, countries with economic and export structures similar to Thailand, were equally depreciated. When became clear that East Asian governments could not guarantee economic or financial stability, local and foreign investors withdrew their financial capital.

From that moment, a sort of financial panic rapidly ripped among investors, so what began as moderately-sized capital withdrawals, after a domino effect, turned to be a massive financial crisis, mostly because of weaknesses in the structure of international capital markets.

The won – South Korean currency - lost half its value, when, in November 1997, Seoul allowed the currency to float. But Lim Chang-yuel, South Korea's finance minister at the time, told Reuters in an interview that he didn’t have a choice: "the Korean economy was almost bankrupt" - the Daewoo Group, for example, had collapsed in the wake of the crisis with debts of some $80 billion.

There are may theories aiming to explain the causes – economical, political, and, in a sense, psychological – that led and enforced such rapid nose-diving. But many economist agree with the idea that weaknesses within the Asian economies, over-investment in dubious activities, balance sheet problems of Asian banks and firms were the main causes.

Besides the role of the International Monetary Fund (IMF) was very controversial during the crisis. Some call the crisis the "IMF crisis", since during the ‘90s the international organization encouraged the developing economies of Asia to follow the path of a "fast track capitalism".

The IMF offered emergency loans of US$17 billion for Thailand, US$50 billion for Indonesia and US$58 billion for South Korea, imposing austerity measures such as raising interest rates and cutting public spending.

In summer 1997, the Asian tigers were to the edge of collapse: a wave of recessions rose across Asia, bankrupting entire nations, shaking markets around the world and – most of all - putting millions out of work.

The consequences were severe for each single country, but the crisis pummeled also the international scenario: The turmoil rippled around the world, affecting markets as far away as Brazil and Russia. An economic area that was receiving huge foreign investments and had significant trading regions, both industrialized and emerging, had been destabilized.

Ten years later
The recovery was uneven for the countries shocked by the crisis. But it seems Asian politics, banks and investors learnt a lot from that dramatic situation, taking steps to protect themselves from risking exposures of their monetary reserves and currencies.

After the turmoil, South Korea's economy contracted and unemployment rate boosted, but by 1999 economy was growing again. The crisis forced the country to make changes (for instance, cleaning up its banking system) that paved the way for more stable long-term growth. Today, South Korea is now the world's 12th largest economy, led by Samsung Electronics Co. - the world's biggest memory chip maker - and Hyundai Motor Co.

Indonesia, after 10 years, continues to struggle. The crisis helped bring about the downfall of former dictator Suharto and a greater political freedom, but economy is still tainted by corruption, with a weak legal system. And even if economy reached 5.5 percent over the last two years, unemployment is rising.

Thai economy is in a mid phase. Japanese investment has made Thailand a major auto and electronics exporting hub, but political uncertainty caused by elections in 2006 and military coup last September has dragged on growth.

Filipino economy is in a growing phase, 6.9 percent in the first quarter of 2007 - the fastest pace in almost two decades. The Peso is stronger, helped along by strong capital inflows that rose by more than half in 2006.

But among the driving engines to Filipino economy, there are the high remittances of Overseas Filipino Workers, which was at $11.44 billion for the first 11 months of 2006 - ten percent of Filipino domestic earnings.

India and China
Differently from other Asian countries, after the crisis, India and China underwent to just a slow down in growth, far from a financial disaster. So ten years after, these two countries lead the region’s economy.

Nicola Ferraris analyzes the main macroeconomic and political engines that brought about the financial crisis of 1997, in addition, in his thesis The East Asian financial crisis: the China's and India's examples the reader can find a punctual survey over the different (and somehow positive) rebounds it had over India and China.

After the Independence in 1947, India went through different phases of economical development. At the beginning, the financial system was quite liberalized, but after '60s the central authorities started imposing a more rigid control on external and internal flows. These rigidities continued through the two following decades. By 1990’s the process was anyway inverted.

According to the author, in comparing India with the other East Asian countries, should be made a notable remark: "the process of liberalization began later. A wise capital control could have somehow influenced the fact that the regional crisis had just a limited impact on India."

The same consideration can be applied to China: compared to the Asian tigers, Chinese economy was still extremely closed, "although the deregulation and the decentralization begun in ‘78, it remained a regulated economy, on which the government kept having a tight control."

China and India started a process of economy liberalization, opening their markets to foreign investors, during 1990’s. Ferraris points out that this process, starting later in the time and being much more controlled by the central authorities, offered a sort of shelter to these countries.

"In fact, often, emerging country crises were following a transition from financial repression to financial liberalization, if not accompanied by prudent rules, which aim at a smooth transaction."

Even if China and India had various problems in common with the countries most affected by the crisis: financial institutions in bad health, weak managerial abilities, lack of transparency and responsibility in the decisional processes, excess of productivity, and political issues, they succeeded in avoiding the worst consequences of the crisis, continuing to maintain a good annual growth rate.

Moreover, for the Association of South-East Asian Nations the recovery of Asian countries from the 1997 financial crisis would have been far more difficult without China's growth. According to Singapore's Minister for Education Tharman Shanmugaratnam: "China has been both a source of competition and a major new market for growth".

Now the region is far wealthier and has far fewer poor people. Of the crisis-hit countries, South Korea, the Philippines and Malaysia regained their pre-crisis level of per capita income by 1999; Indonesia and Thailand recovered by 2003.

But ten years after, the crisis is a testament demonstrating how policy mis-steps and hasty reactions by governments, the international community, and market participants can transform a moderate adjustment into a into financial panic and a deep crisis.