Asia's economic and financial crisis - ten years on

21 September 2007

Zainal Aznam Mohd Yusof, Distinguished Fellow, Institute of Strategic and International Studies, Kuala Lumpur, Malaysia, focused on the effects of the 1997 financial crisis on the development of ASEAN[i], the Association of Southeast Asian Nations, with its ten member countries and 500 million people.

The Asian financial crisis originated in Thailand in mid-1997 after the country’s lack of financial resources in the face of devaluation caused its currency (the baht) to “unwind”. Its effects then spread throughout the region, with Malaysia, Indonesia, South Korea and Hong Kong hardest hit.

By the close of the crisis in 1998, three of the largest South-east Asian economies - Malaysia, Thailand and Indonesia - had introduced domestic financial measures to prevent it happening again, and ASEAN had set in place measures to encourage regional economic integration and strengthen the regional economy. These included reducing tariff barriers between members, establishing an ASEAN Free Trade Area (AFTA), and introducing a Common Effective Preferential Treatment (CEPT) scheme allowing ASEAN countries to integrate at different speeds, depending on their economic maturity.

ASEAN also introduced the ASEAN Investment Area (AIA) to liberalise rules for foreign direct investment (FDI) in goods (but not initially in services) and attract FDI into the region, as well as an accord on trade in services: the Framework Agreement on Services (AFAS). However, said Mr Yusof, the long-term success of all these measures has been mixed, not least because of competition from its strongest neighbour, China.

In addition, ASEAN launched two initiatives to promote greater regional financial integration. The first, the Chieng Mai Initiative (CMI), expanded financial “swap arrangements”, so that countries under speculative attack could borrow foreign currency to stabilise their economy. The second, the Asian Bond Market Development Initiative (ABMI), was a long-term financing scheme to build up private sector investment and combat the risk of short-term debt, one of the causes of the 1997 crisis.

The growth of regional trading agreements and financial partnerships has been an important feature of post-crisis ASEAN. As well as bilateral agreements between countries, it has initiated the ASEAN-China Free Trade Agreement (FTA), the ASEAN-Japan FTA and the new ASEAN-EU FTA, among others.

An ASEAN Charter, which will make the organisation more rules-based and includes more social ‘norms’, is due to be signed in November, and there are also plans to set up an ASEAN Economic Community by 2015. This will establish a single market and production base, and focus on security, economic and socio-cultural areas.

Mr Yusof concluded that despite these measures, neither the pace nor depth of ASEAN economic integration and growth has been “spectacular”. He also questioned whether the ASEAN method of reaching agreement by consensus could survive the proposed Charter. He foresaw that ASEAN might break up into a “two-speed” organisation, with the more developed countries opening up faster than the CLMV.

Indonesia - the decade of living dangerously

Yuli Ismartono, Executive Editor, TEMPO Weekly New Magazine, Jakarta, focused on how the Asian economic crisis had forced through monumental political change in Indonesia.

She said that while the country had been hit financially by the crisis, it had benefited politically, and this had resulted in a decade of “living dangerously”. After events in Thailand, the Indonesian economy went into “free fall”, leading to demonstrations, a loss of public order and the ousting of President Suharto, who had ruled Indonesia for 32 years. This started a “revolution of political reforms”.

His successor, President Habibie deregulated the media and prepared for the country’s first free elections since 1955. However, the euphoria was shattered by events in East Timor, where after a United Nations referendum which voted for independence, government troops rampaged, killing 1,400 East Timorese.

In a surprise election result, the ageing Muslim cleric Abdurahman Wahid was chosen as President, but he was impeached for corruption just two years later and Megawati Sukarnoputri, daughter of the first president, Sukarno, succeeded him. Since then, the country has seen three major reforms which have consolidated democracy: electoral reform, decentralisation of government authority and freedom of the press.

Elections have been introduced at all levels, and the national legislature has also been restructured to provide an upper and lower house. The country now has a multi-party system, replacing Suharto’s single party (Golkar) rule, but while elections have been peaceful and fair, the armed forces still retain considerable influence, particularly in the regions.

New autonomy laws have substantially decentralised government authority, delegating the delivery of public services to local authorities and strengthening the role of regional legislators, but central government retains control over finance, religion, defence and foreign policies. The provinces have “bloomed” under these new laws, said Ms Ismartono.

The new press law passed in 1998 ushered in unprecedented media freedom. With the need for publishing permits scrapped, 700 new publications, 1,000 radio stations and 11 national television stations have been launched. However, these still operate under restrictions, with huge fines levied for defamation, and journalists’ mobile phones are still tapped. This, said Ms Ismartono, was the result of “the old mind-set prevailing” during the ‘work in progress’ of building a democratic system.

Nevertheless, the pace of reform continues unabated, with a vibrant civil society and more respect for human rights. “Revolution in Indonesia’s political system is the story of the decade,” she said.

Changing the old “mindsets”

Seamus Gillespie, Head of Unit, South-East Asia Desk, DG Relex, European Commission, said the considerable change in South-East Asia over the last ten years provided a good basis for further development.

The changes in the region were not only the result of the financial crisis. It was now in a transitional phase, with huge reductions in poverty giving ordinary people more hope of a better life. Unfortunately, however, some of the old “mind-sets” remain, with the military “still there” in the background.

Mr Gillespie pointed out that increasing wealth had led to growing inequalities, even in countries with a socialist government like Vietnam, and these needed to be tackled. One reason for this was the weak administration, and poorly performing and badly coordinated public ministries and policies.

While countries such as Indonesia are working to improve their investment structure, making major fiscal reforms and increasing competitiveness to attract back foreign investment, Mr Gillespie wondered whether this would be “carried through”. He also warned that the move from middle-income to high-income countries needed to be managed.

The financial crisis had laid down a challenge to the EU, he said, as it showed that the Union had not been paying enough attention to developments in the region. The current European Commission has remedied this, building strong political contacts and engagement, as evidenced by the successful ASEAN-EU Aceh Monitoring Mission and the ASEAN-EU Foreign Ministers meeting in March this year.

The EU believes that greater integration in the region will help ASEAN to tackle economic and political challenges, and is supporting efforts to promote this, even though this is not “the panacea” for all the region’s ills. Mr Gillespie said greater integration would also give ASEAN countries more political clout in international fora such as the World Trade Organisation, as the EU itself had found.

The Commission is building up common passport and customs procedures with ASEAN, and concentrating on proposals (such as the creation of an ASEAN-EU FTA) which support integration. It is also supporting ASEAN initiatives to promote greater monetary cooperation and stimulate markets in bonds in ASEAN currencies.

[i]     ASEAN consists of ten countries: the six original founders: Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand (known as ASEAN 6) and newer members: Cambodia, Laos, Myanmar and Vietnam (known as CLMV).