Asia Ten Years After
| Author | David Burton/Alessandro Zanello |
| Position | Director/Assistant Director of IMF's Asia and Pacific Department |
A decade after the Asian financial crisis, the region is growing rapidly but still has a long to-do list
Ten years ago, the Asian financial crisis of 1997-98 began to unfold. Few countries in the region were left untouched, and the aftereffects reverberated across the globe. A decade later, Asia shines in the global economic landscape, and its vitality stands out as a remarkable achievement. But what lies behind this success, and what are the new challenges for a region that has become a dynamo for the world economy?
In retrospect, the Asian financial crisis proved to be a temporary setback, despite its enormous economic and social costs. Its hallmark was the sudden reversal of investor sentiment and abrupt withdrawal of international capital. Doubts about the soundness of financial institutions and corporates spread quickly across national borders, creating a vicious circle of capital outflows, plummeting exchange rates, and crippling balance-sheet effects in the crisis-struck countries. Private demand collapsed and output in the most affected economies contracted quickly and sharply. The underdevelopment of social safety nets to protect those most exposed to economic disruptions exacerbated the social and economic impact of the slumps.
The international community stepped in to help as private investors were stampeding for the exits, providing external financing (including IMF assistance), while governments in the region adjusted policies, taking increasingly strong and appropriate action, and steps were taken to coordinate private sector financing. After some adjustments, this combination eventually turned the tide: confidence recovered and capital started returning. As financial and real sector weaknesses were tackled, output in the hardest-hit countries began expanding again. The most determined reformers were the first to claw back the ground lost and, by 2003, GDP in all crisis countries had surpassed its precrisis level (see Chart 1). GDP per capita took a bit longer to do so.
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Today, Asia is among the star performers in the global economy. The region found strength in no small part by turning crisis into opportunity. The testing times of the late 1990s have rekindled a sense of regional identity and shared economic destiny. Regional policy forums have taken on renewed importance. Policy cooperation is gaining traction, and initiatives like the Chiang Mai network of bilateral swap lines among Asian central banks, which is now being converted into a reserve-pooling arrangement, and the Asian Bond Fund project provide a welcome measure of self-insurance and commonality of purpose. In addition, intraregional trade has grown rapidly, with the development of complex supply chains centered on China.
At the same time, Asia has not turned its back to the outward-looking orientation that propelled its spectacular rise on the world's economic stage. Intraregional commerce is so far complementing- not substituting for-global trade. With deepening financial and trade connections inside...
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