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Asia and the next financial crisis 

February 22, 2016

East Asia Forum

The Asian financial crisis of 1997–98 was a huge turning point in Asia. Asia’s confidence in the IMF and the US leadership to help through global institutions in a time of crisis was seriously shaken. The disillusionment was deepest in Tokyo, Seoul, Bangkok and Jakarta — Beijing was then an innocent defender of the status quo.

The global financial crisis ten years later triggered reforms to the IMF and the global financial safety net that are still to be fully implemented. Without follow through on these reforms — to correct the disenfranchisement of the emerging Asian powers in the Bretton Woods system — the global financial system is vulnerable to Asia starting or amplifying the next financial crisis. The uncertainty and risk as China navigates its financial integration into the regional and global economy magnifies that risk.

From the middle of 1997, with Thailand, Indonesia and South Korea unable to defend their collapsing currencies from capital flight, debt denominated in US dollars ballooned, asset prices plummeted and these countries effectively became insolvent. Other countries in the region were not affected as badly, but the crisis shook Asia and brought it to its knees with a drop in incomes that more than matched that in industrial countries in the Great Depression of the 1930s.

The IMF stepped in to stop the crisis spreading but the help provided to Asia was late and the medicine was bitter, with harsh, and in retrospect unnecessary, conditionalities that had strong side-effects. The global financial crisis 10 years later saw very different policies adopted towards North Atlantic economies. Perhaps the lessons of the Asian financial crisis had been learnt; perhaps it had more to do with the weight of the North Atlantic powers in the IMF and global institutions. Read more

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