Crash Nº 8 · 1993–1998
The Asian Financial Crisis
Miracle economies discover what a pegged currency really costs
−53% Thai baht vs the dollar, June 1997 to the 1998 trough
The Setup
The World Bank called it the East Asian Miracle, and the growth was real: Thailand, Malaysia, Indonesia, and Korea had industrialized faster than any economies in history. The displacement of the 1990s was financial opening — Thailand’s offshore banking window, the Bangkok International Banking Facility, was built to import dollars, and it worked spectacularly.
Dollar loans came in short-term and cheap; pegged exchange rates made hedging look like a waste of money. The borrowed dollars went long — into Bangkok office towers, Jakarta conglomerates, Korean chaebol capacity — creating the double mismatch of currency and maturity that the book marks as the signature of every emerging-market bust since 1825.
By 1996 exports had stalled, the towers were empty, and the finance companies that funded them were quietly insolvent. The money kept coming anyway — the peg guaranteed it, everyone said.
Displacement, 1993–95
Financial opening turns a trade miracle into a capital-inflow machine. The baht sits welded at 25 to the dollar, which is precisely what makes the borrowing feel safe.
Boom past the fundamentals, 1996
Export growth stops; construction doesn’t. Finance companies roll short dollar funding into empty towers, and the current account deficit hits 8% of GDP — Mexican territory, two years after Mexico.
The doomed defense, first half of 1997
Defaults begin — Somprasong in February, Finance One by May — and speculators test the peg. The central bank fights back with $30bn of forward sales it doesn’t really have, doubling the bet at the top of the cycle. The chart stays flat to the last day.
Distress becomes contagion, July–October 1997
Floated on July 2, the baht drops by a fifth in a day — and every dollar debtor in Asia is suddenly suspect. The Philippines, Malaysia, and Indonesia follow within weeks; the rupiah goes into free fall.
Panic, November 1997 – January 1998
Korea — the world’s eleventh-largest economy — runs out of reserves rolling its banks’ short-term debt and signs with the IMF in December. The baht bottoms −53% from June; Indonesia’s GDP will shrink by an eighth, and Suharto’s thirty-year regime falls with the rupiah.
The Reckoning
The rescues came with austerity that deepened the slump, and Asia drew a generational conclusion: never again depend on the IMF. The region spent the next decade hoarding the reserves that would cushion 2008. In the book’s framework, 1997 is the definitive twin crisis — banking and currency collapsing together — and the proof that the lender of last resort’s conditions matter as much as its money.
What it cost
On the World Bank’s calculation, urban poverty in South Korea more than doubled between 1997 and 1998, from 8.6% to 19.2%, while the urban standard of living fell 21.6%; in Indonesia the share of the population below the national poverty line went from 11.0% to 19.9%. Independent reconstructions of the Indonesian household data put the peak far higher. Thailand, where the crisis began, came off comparatively lightly.
- 15% → 33% Indonesia’s poverty rate from the onset of the crisis in mid-1997 to its peak late in 1998 — a rise of 18 percentage points, or about 36 million more people below the line; it was back near 15% by the end of 1999 Suryahadi, Sumarto and Pritchett, The Evolution of Poverty during the Crisis in Indonesia, SMERU Research Institute working paper, revised March 2003, abstract
- 2.6% → 6.8% South Korea’s unemployment rate, 1997 and 1998 yearly averages — 556,000 people out of work, then 1,463,000 Se-Il Park, The Labor Market Policy and Social Safety Net in Korea: After the 1997 Crisis, Brookings appendix, Table 1-1, on National Statistical Office data
- 11.0% → 12.9% Thailand’s nationally defined poverty rate, 1997 to 1998, on the World Bank’s mid-1999 calculation; incomes fell 13.6%, but the crash there mainly hit the urban middle classes, still a small share of the population Congressional Research Service, Asian Financial Crisis and Recovery: Status and Implications for U.S. Interests, RL30517, 6 April 2000
In mid-May 1998, as the rupiah fell, mobs in Jakarta and other cities looted and burned commercial districts, and the ethnic Chinese community was a particular target of the violence. Government sources put the death toll at 499, many of them looters trapped in burning stores; the National Human Rights Commission said it had received a report listing 1,188 deaths. The joint fact-finding team the government convened in July verified 85 reports of violence against women, including 66 rapes, the majority of the victims Sino-Indonesian, and said the number was probably higher because witnesses and victims had been intimidated.
What followed
Suharto had been in power since 1967. After the Trisakti shootings, the riots, and the huge student demonstrations at the parliament complex that began on 18 May, he resigned on 21 May 1998; his hand-picked vice-president, B.J. Habibie, set in motion the elections of June 1999, the first open ones since 1955. Thailand’s crisis had already forced out Prime Minister Chavalit Yongchaiyudh in November 1997 and tipped the balance towards a new constitution, the sixteenth since 1932. In Korea it boosted the campaign of Kim Dae Jung, whose election that December was widely read as strengthening democratisation.
US Department of State, 1998 Country Reports on Human Rights Practices: Indonesia; US Department of State, 1997 Country Reports on Human Rights Practices: Thailand, 30 January 1998; Congressional Research Service, Asian Financial Crisis and Recovery, RL30517, 2000; CRS, Indonesia: May 1998 Political Crisis and Implications for U.S. Policy, 98-468F, 18 May 1998