What We Have Seen and Learned 20 Years After the Asian Financial Crisis
IMF Blog, July 13, 2017
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- Authors: Mitsuhiro Furusawa
- Published: July 13, 2017
Overview
- Author: Mitsuhiro Furusawa
- Date: July 13, 2017
- Main point: Asia is now the fastest-growing region in the world and the largest contributor to global growth, and is overall better prepared to face major economic shocks than it was 20 years ago.
The 1997 Asian Financial Crisis: triggers and impact
- Crisis onset: July 1997; began in Thailand on July 2 when the baht’s peg to the dollar was dropped.
- Geographic spread: Eventually spread to Korea, Indonesia and other countries.
- Nature of the crisis: Marked by abrupt swings in external current accounts, deep recessions, surging unemployment, and sharp drops in living standards, especially among the poor.
- Example of impact: Indonesia lost over 13 percent of its output within one year.
- Short-term dynamics: Initial downturns in most countries were very sharp, followed by strong bounce-backs in subsequent years.
Reforms undertaken and sources of increased resilience
- Policy and structural reforms in the region after 1997:
- Adoption of more flexible exchange rates.
- Reduction of external vulnerabilities.
- Overhaul of financial sector regulation and supervision.
- Resolution of the private sector debt overhang.
- Development of domestic capital markets.
- Outcome by 2008: The 2008 global financial crisis hit hard in the US and Europe, but Asia experienced only a mild slowdown; growth remained positive and quickly accelerated after a small dip.
- Institutional changes at the IMF and internationally:
- Reforms in how the IMF assesses fiscal, monetary and financial vulnerabilities.
- Lending programs streamlined to focus on crisis-resolution priorities.
- Higher priority placed on safeguarding social spending to protect the poor and vulnerable.
- IMF governance reforms increasing the voting share and representation of Asian countries.
Global financial safety net and coordination
- Regional arrangements: Asian countries boosted their economic defenses and put in place a regional safety net, including the Chiang Mai Initiative Multilateralization (CMIM).
- International coordination: The Fund has worked closely with ASEAN+3, CMIM, and other multilateral organizations to strengthen the global financial safety net.
- IMF lending capacity: Member countries committed additional bilateral loan resources to the IMF to boost its lending capacity to almost $1 trillion.
Remaining vulnerabilities and risks
- Domestic vulnerabilities in some countries:
- Elevated levels of corporate debt.
- Elevated levels of household debt.
- Demographic challenge: Rapid population aging in some countries.
- External risks: Risks from more inward looking policies in the advanced economies.
Policy implications and recommendations
- Continue domestic reforms to build resilience, including addressing corporate and household leverage.
- Invest for the future to manage population aging and sustain growth.
- Strengthen policy frameworks and pursue more inclusive economic growth with IMF support.
- Foster closer trade and financial integration within the region and with the rest of the world to maintain Asia’s role as a major contributor to global growth and stability.
Key findings and takeaways
- Asia has become the fastest-growing region in the world and the largest contributor to global growth.
- Reforms after the 1997 crisis materially increased Asia’s resilience to later shocks, including the 2008 global financial crisis.
- The international financial architecture and IMF tools were reformed and strengthened based on lessons from the 1997 crisis.
- Significant challenges remain, notably elevated corporate and household leverage, population aging in some countries, and external policy risks.
Source: Mitsuhiro Furusawa, July 13, 2017.
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