Financial meltdown that affected most East Asian countries from the middle of 1997
, with severe economic and political consequences. The countries worst affected were the Tiger Economies
, The Philippines
and South Korea
Throughout the first half of the ninties the East Asian economies enjoyed spectacular economic growth. This had come about through a number of happy co-incidences : Japan was moving its production abroad, oil and credit was cheap, trade and investment flows were rising, the workforce was increasingly better educated and the world seemed safer and more exciting. The concepts of Asian Values valuing thrift, education and benevolent authoritarianism began to be seen as an effective prescription for economic success, better than democracy which seemed to have screwed up the former Soviet Union.
But as Paul Krugman predicted, East Asia's growth was not sustainable. More and more factors of production were being hurled into Asia but there wasn't much of a corresponding rise in productivity. Poor banking governance (and hype) led to over-investment in capital intensive projects to the peril of their current account deficits.
On 2nd July 1997 the Thai government floated the Baht as a response to the appreciating US dollar which their currency was pegged to. Within two weeks the Baht lost 30% of its value. Other Asian economies which were financially over-exposed in US dollar debts were equally in trouble.
Their predicament was not helped by either currency speculators trading off the contagion, or by China's cheap Yuan and highly competitive manufacturing base.
In August the IMF was sent in to help. As part of aid packages most countries were able to initiate reforms in their banking systems. However this required governments to be exceptionally stringent in their fiscal and monetary policy, causing banks to collapse and poverty to return. The impact the IMF had on Indonesia caused political fracturing nationwide and the eventual toppling of President Suharto.
Around 1999-2000 the region began to see some economic growth, but nothing like at the levels it witnessed earlier.