A decade after Thailand devalued its currency on July 2, 1997, sparking a financial crisis that engulfed nearly the entire Southeast Asian region with one casualty in Northeast Asia (South Korea), what has changed?
The crisis-affected Southeast Asian countries have stabilized themselves but never really regained the dazzling growth of the mid-1990s. Structural economic and financial reforms have been made, but many analysts believed these reforms have not been deep enough. Outside economics, several major Southeast Asian countries remain politically unstable, including a military coup and growing political violence in the South in Thailand in 2006; unresolved communist and separatist insurgency movements in Philippines and increased terrorist threats. Indonesia, the largest country in Southeast Asia is still undergoing the pains of democratic transition and recovering from the collapse of the Suharto government and fallout from terrorism and the Bali bombings in 2002.
In contrast, the only real victim of the crisis in Northeast Asia has recovered and grown stronger. “Korea’s economic policy has become more consistent during the last 10 years,” said Lee Jang Yung, the assistant governor at the South Korean government’s Financial Supervisory Service. “Its financial system has become stronger and sound.” Within two years, South Korea bounced back; after a 7 per cent economic contraction in 1998, it regained growth in 1999 following an aggressive restructuring programme. The crisis forced South Korea to open up its economy resulting in an inflow of FDI amounting to 102 billion dollars from 1998 to 2006, or 80 per cent of the country’s inbound investments since 1962.
This contrasts with Indonesia. By some estimates, Indonesia's economic development was turned back for at least 10 years. Even now, some say the same reasons responsible for Indonesia’s crisis regrouped and appeared in a different guise in the post-1997 scenario. For example, during the crisis, the Salim Group was forced to give up its financial institution Bank Central Asia to the government and turn to the state for financial lifelines but 10 years later, Salim has regrouped under the stewardship of Mr Liem's youngest son, Mr Anthony Salim. Its extensive food manufacturing businesses remain intact and, more recently, Mr Salim pulled off a major corporate coup when his Singapore-listed Indofood Agri Resources announced that it would pay US$1 billion (S$1.53 billion) for a controlling stake in PT London Sumatra, a 100-year-old company which controls large swathes of oil palm plantations in Indonesia. Critics argue that he was able to do so by taking advantage of their political ties and the country's weak legal system.
Similarly, despite defaulting on US$14 billion, Indonesian businessman Eka Tjipta Widjaja continues to control companies such as Singapore-listed plantation Golden Agri-Resources. Other than the return of old cronynism, the effects of the crisis are lingering in other ways. In Indonesia, 39 million people in the nation of 220 million are officially classified as 'poor', four million more than in 2006. All these factors caused Southeast Asia’s Indonesia to recover last in 2003.
Besides lingering weaknesses, Southeast Asian economies remain stagnant in implementing progressive features. ‘’South Korea, Taiwan and China are making tremendous efforts in science and technology, but in South-East Asia, only Singapore has a very strong policy towards R&D,’’ said Guy Faure, director of the Bangkok-based Research Institute on Contemporary South-East Asia. ‘’That’s the problem with South-East Asia.’’ In addition, Southeast Asia continues to fall behind the European Union (EU) and the North American Free Trade Agreement (Nafta) in regional economic integration and is severely dependent on a genuine and robust reconciliation between Japan and China to have an integrated future. Because of such factors, Southeast Asian countries are no longer the real stars of economic growth inEast Asia with the exception of Vietnam. The star of the past decade has of course been China, and in the more recent years, India.
Vietnam, which once rivaled Laos and Papua New Guinea in poverty, has now surpassed Thailand in annual cement consumption while China is now the world’s leading steel producer and India has become a global leader in computer software development and outsourcing, and is now recording double-digit growth in manufacturing as well. In Northeast Asia, a sign of Chinese economic power is that, while many Southeast Asian countries used to ship electronics and other goods directly to the United States, today they tend to ship components to China, where they are assembled and shipped to American ports.
Some regional papers go as far as to say that China has helped pull up its Asian neighbours after Western investors pulled the rug from under them 10 years ago. At the height of the crisis, China remained a bastion of stability and despite losing its export competitiveness as other countries' currencies fell, China's decision not to devalue its renminbi (yuan) played a critical role in stabilising the economy. "In a responsible manner, the Chinese government committed not to depreciate the currency and took a series of active measures to help those countries recover from the crisis." Wu Xiaoling, the vice-governor ofChina's central bank, said at the "Asian Financial Crisis 10th Anniversary Forum" held in Beijing.
One big beneficiary of Chinese economic power was Hong Kong. After Hong Kong returned to China's sovereignty on July 1, 1997, the Asian financial crisis struck the next day, spiraling Hong Kong into its longest recession in history before it was rescued by Chinese economic power, making Hong Kongers realize and perhaps appreciate their economic dependence on China - perhaps for the first time since colonization. Backed by Beijing, Hong Kong's first Chinese financial secretary Donald Tsang spearheaded a HK$120 billion (S$23 billion) strategy to fend off speculative attacks on the city's stock and currency markets who could have crashed the market by punting on the Hong Kong currency and bargain-priced shares.
China also actively took part in the International Monetary Fund aid programme, offering $4 billion to the Asian countries affected. The Chinese government also realised that the crisis elsewhere in the region was caused by a lack of transparency in financial systems and undertook its own structural reforms to avoid falling into the trap that the other Asian economies fell into. The solution by the Chinese government was quick and decisive.
In 1998, the government injected 270 billion yuan into state-owned commercial banks and peeled off 1.4 trillion yuan worth of bad loans for them and then quickly implemented reforms; state-owned giants including China Industrial and Commercial Bank, China Construction Bank, China Bank, China Communication Bank and some others successfully listed on Chinese and overseas stock markets, which greatly increased their transparency boosted by supervision based on international standard accounting and auditing rules improved governance as well.
Concluding, the fear of another crisis remains and Asian countries were warned against complacency. As Nobel laureate Stiglitz points out: “Some similarities exist between the situation then and today: Before the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries - a sixfold increase in six years. Later, such capital flows stagnated.” He highlights two lessons to be learnt. The first is that capital market liberalisation may not always be good as the only two major developing countries to be spared the crisis, India and China, demonstrated. The second lesson is that there is a need for a credible international financial institution to design the rules to enhance stability and promote economic growth in developing countries.
The president of the Asian Development Bank (ADB) also warned of potential market volatility from large inflows of capital. Calls for Asia to hasten and deepen regional monetary cooperation and rethink the idea of an Asian Monetary Fund has also been persistent over the years and in the most recent meeting in Manila on the 10th anniversary of the Asian Financial crisis, various Asian ministers echoed that “efforts to tackle future financial crises in East Asia should be spearheaded by a regional response”. This is due in part to the lingering resentment over the IMF’s handling of the 1997-98 crisis, and the fact that the region’s financial muscle has been growing over the years by surging inflows of foreign capital. (3 July 2007)
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