When did the Asian Financial Crisis of 1997 actually begin? Most South Koreans will trace its origins to the stream of bad economic news that cast a pall over the otherwise crisp days of autumn 1997. The Thais will likely push it back a few months to the early summer, when currency traders could not sell Thai baht fast enough, putting unbearable pressure on the exchange rate. For Indonesians, the full impact of a crisis that would eventually roll back the economic gains of three decades was not felt until the early part of 1998. Others first sensed that something big and dreadful was afoot in July 1997, when the Prime Minister of Malaysia, Mahathir bin Mohamad, blamed the freefall of Southeast Asian currencies on a ‘worldwide Jewish conspiracy’, headed by George Soros. Conspiracy or no, the event is so indelibly etched in the collective memory of the region’s investors that when, in August 2007, the Dow Jones industrial average dropped 340 points amid fears of a liquidity crunch triggered by the tanking of the us sub-prime mortgage market, South Korea’s stock market suffered its biggest decline in five years as small investors fled in fear of another crash. Indonesia’s stock index also recorded a 7 per cent drop. The American market then quickly rebounded; the others did not.footnote1

Nevertheless, the Asian Crisis was spectacular not only for the ravages it caused (in an area that was deemed immune to ravages of this kind) but for the speed of the recovery. By the last quarter of 1998 the financial contagion was over, and the countries that had been affected most severely—South Korea, Malaysia, Thailand and Indonesia—were more or less back on their feet. Those who had quarreled over the causes of the meltdown—the World Bank and imf, policy makers and economists—could now agree, happily, on one thing: the recovery was so fast as to be ‘V-shaped’.footnote2 In addition, the crisis seemed to have served a useful purpose. Today, the Central Bank coffers of these economies are brimming with foreign-exchange reserves which can be used to defend their currencies and, through swap agreements, other nations’ currencies under stress. This mutual assistance is also occurring as East Asia’s reliance on the American economy declines, making it potentially resilient enough to withstand—and perhaps even absorb?—the shock of the latter’s economic slowdown.

In itself, the crunch of 1997–98 was a classic liquidity crisis, if exacerbated by idiosyncratic institutional practices in the affected countries. It had all the requisite dramatis personae: the global herd of institutional fund managers, who behaved as though to confirm Engels’s adage that there is nothing more sordid than a panicky capitalist; the us Treasury officials, leaping at the chance to open up the East Asian economies—especially South Korea—once and for all, regardless of the causes of the crisis; and the imf officials, putting in place high interest-rate policies in the distressed economies, then retreating turtle-like inside their carapaces from the harangues of outraged peoples around the world. The short-term impact of the crisis was very severe: across the region numerous companies, big and small, were driven out of business, unable to meet the (now high) interest rates or to get leniency from the (suddenly tough) bankruptcy courts. In South Korea, legislation protecting employment rights was dismantled, leading to large numbers of workers being laid off. In Indonesia, those made redundant in the cities migrated back to the rural areas whence they came. When the state subsidies for food and oil—the pillars of Suharto’s ‘New Order’ for over three decades—were abruptly curtailed, the unemployed vented their anger and frustration on fellow-victims who were no more responsible for the crisis than they were: storekeepers and small merchants who happened to be ethnic Chinese. As a result, 1998 can also be remembered as a year of riots and pogroms, the likes of which had not been seen in Indonesia since 1965.

One reading of the Asian Financial Crisis of 1997–98, then, is as a local paroxysm within a longer line of what Charles Kindleberger described as ‘manias, panics and crashes’; successive harbingers of the comparable events in Brazil and Russia in 1998, and Argentina from 1999 to 2003. But it is also possible to read the crisis within a more specifically Asian context, as a regional turning point of historic significance. For with it, the old political and economic order went up in flames—a metaphor to which I shall return—and a new one came into shape.

To understand this new order, it is worth remembering that for some, the Asian Crisis had its real origins not in 1997 but in 1994, when China abandoned the official exchange rate for its currency. This depreciation boosted Chinese exports considerably and put enormous pressure on Thailand. Over the next few years Thais struggled to export their manufactured goods and service their debt—unable to engage in competitive devaluation since their currency was effectively pegged to the us dollar. International investors like George Soros saw the opportunities, and the short-selling of the baht began.