What we have seen and learned 20 years af­ter the Asian fi­nan­cial cri­sis

Financial Nigeria Magazine - - Contents - By Mit­suhiro Fu­ru­sawa Mit­suhiro Fu­ru­sawa is Deputy Man­ag­ing Di­rec­tor of the In­ter­na­tional Mon­e­tary Fund. Source: IMF Blog

Asia to­day is the fastest-grow­ing re­gion in the world, and the largest con­trib­u­tor to global growth. It has six mem­bers of the Group of Twenty ad­vanced and emerg­ing economies, and its eco­nomic and so­cial achieve­ments are well rec­og­nized.

But 20 years ago, July 1997 marked the be­gin­ning of the Asian Fi­nan­cial Cri­sis, when a com­bi­na­tion of eco­nomic, fi­nan­cial and cor­po­rate prob­lems trig­gered a sharp loss of con­fi­dence and cap­i­tal out­flows from the re­gion's emerg­ing mar­ket economies. The cri­sis be­gan in Thai­land on July 2, when the baht's peg to the dol­lar was dropped, and even­tu­ally spread to Korea, In­done­sia and other coun­tries.

The 20th an­niver­sary of the Asian Cri­sis is a good mo­ment to ask whether the re­gion is bet­ter pre­pared to­day to ad­dress an­other ma­jor eco­nomic shock. I would of­fer a “Yes, by all means.” Of course, im­por­tant vul­ner­a­bil­i­ties re­main, es­pe­cially the el­e­vated lev­els of cor­po­rate and house­hold debts in some coun­tries. But the over­all pic­ture is one of greater re­silience. Let me ex­plain why.

The Asian Cri­sis was un­prece­dented in its na­ture and in­ten­sity. It was marked by abrupt swings in ex­ter­nal cur­rent ac­counts, deep re­ces­sions, surg­ing un­em­ploy­ment, and sharp drops in liv­ing stan­dards, es­pe­cially among the poor.

For ex­am­ple, In­done­sia lost over 13 per­cent of its out­put within one year. As the graph be­low shows, while the ini­tial down­turn in most coun­tries was very sharp, the bounce back was noth­ing short of im­pres­sive. Asia weath­ered the storm to emerge as a ma­jor en­gine of global growth over the past decade.

The re­gion now is much bet­ter pre­pared to face fi­nan­cial tur­bu­lence. In fact, a ma­jor global fi­nan­cial cri­sis al­ready oc­curred, and the re­gion was well placed to ride out the down­turn. 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 again af­ter a small dip.

What was dif­fer­ent a decade later? In re­sponse to the 1997 cri­sis, Asian coun­tries un­der­took strong re­forms and ad­dressed the root causes: many adopted more flex­i­ble ex­change rates; re­duced ex­ter­nal vul­ner­a­bil­i­ties; over­hauled fi­nan­cial sec­tor reg­u­la­tion and su­per­vi­sion; re­solved the pri­vate sec­tor debt over­hang; and de­vel­oped do­mes­tic cap­i­tal mar­kets. These re­forms clearly made Asia more re­silient in 2008.

The IMF and the in­ter­na­tional fi­nan­cial sys­tem also evolved af­ter the cri­sis. When the Asian cri­sis hit, the in­ter­na­tional com­mu­nity, work­ing through the IMF, mo­bi­lized around the res­cue pro­grams. It is true that the ini­tial de­sign of those res­cue pack­ages had to be ad­justed as the sit­u­a­tion evolved; for in­stance, af­ter a pe­riod of tight­en­ing, fis­cal pol­icy was eased to cush­ion the sharp down­turn. The cri­sis re­sponse and ex­ten­sive re­forms un­der­taken by the coun­tries helped re­store con­fi­dence and lay the foun­da­tions for a rapid and sus­tained re­cov­ery.

In sub­se­quent years, we un­der­took a se­ri­ous ef­fort to learn from these ex­pe­ri­ences and im­prove our poli­cies and tool­kit. The ef­fort re­sulted in ex­ten­sive re­forms of how the IMF as­sesses fis­cal, mon­e­tary and fi­nan­cial vul­ner­a­bil­i­ties, and how coun­try pro­grams are struc­tured. These les­sons were sub­se­quently ap­plied dur­ing the 2008 and Euro Area crises.

For ex­am­ple, we now de­vote a lot more at­ten­tion to as­sess­ing fi­nan­cial vul­ner­a­bil­i­ties on a na­tional, re­gional, and global scale. Our lend­ing pro­grams are more stream­lined, fo­cus­ing on what is crit­i­cal for re­solv­ing a cri­sis, and place a high pri­or­ity on safe­guard­ing so­cial spend­ing to pro­tect the poor and vul­ner­a­ble. The IMF also re­formed its gov­er­nance, in­creas­ing the vot­ing share and rep­re­sen­ta­tion of Asian coun­tries.

The global fi­nan­cial safety net has also been strength­ened, through bi­lat­eral swap lines and re­gional fi­nan­cial ar­range­ments. Af­ter the 1997 cri­sis, Asian coun­tries played an im­por­tant role by boost­ing their eco­nomic de­fenses and putting in place a re­gional safety net, of which the best­known part is the Chi­ang Mai Ini­tia­tive Mul­ti­lat­er­al­iza­tion (CMIM). The Fund also has been work­ing continuously to strengthen the global fi­nan­cial safety net by work­ing closely with the ASEAN+3, CMIM, and other mul­ti­lat­eral or­ga­ni­za­tions. Our mem­ber coun­tries have also com­mit­ted ad­di­tional bi­lat­eral loan re­sources to the IMF to boost its lend­ing ca­pac­ity to al­most $1 tril­lion.

While Asia is much more re­silient to shocks com­pared to 20 years ago, it also faces new chal­lenges in­clud­ing high cor­po­rate and house­hold lever­age and rapid pop­u­la­tion ag­ing in some coun­tries and risks from more in­ward look­ing poli­cies in the ad­vanced economies. In this en­vi­ron­ment, Asia needs to con­tinue its re­forms and in­vest for the fu­ture to build re­silience. Here, the IMF is ac­tively sup­port­ing mem­ber coun­tries' ef­forts to strengthen their pol­icy frame­works and pur­sue more in­clu­sive eco­nomic growth. At the same time, Asia should con­tinue to fos­ter closer trade and fi­nan­cial in­te­gra­tion within the re­gion and with the rest of the world to en­sure that it re­mains a ma­jor con­trib­u­tor to global growth and sta­bil­ity.

While more work re­mains to be done, we're also sure that Asian economies are bet­ter pre­pared and in a stronger po­si­tion to weather new fi­nan­cial storms, thanks partly to Asia's tremen­dous sac­ri­fices and re­form ef­forts in re­sponse to its own fi­nan­cial cri­sis twenty years ago.

Mit­suhiro Fu­ru­sawa

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