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  • Writer's pictureMaerten Beuming

Too Weak to Spring? In the Steps of China's "Paw-Trail" After the 1997 Asian Financial Crisis


The Asian Financial Crisis of 1997 was one of many that foreshadowed the 2008 Global Financial Crisis. Arguably often overlooked by present scholars, the countries of Thailand, Malaysia, Indonesia, the Philippines and South Korea saw unprecedented economic downturn effectively overnight. Sudden drops in GDP growth and devaluation of local currencies leading to unfavorable terms for foreign investors. Whilst there are a variety of factors that led to the complete collapse of development in the region, I argue that there is a perspective that is often overlooked when discussing how such large-scale economic crises occur. The rules of the game seem to be rigged from the start for states that attempt to economically catch-up and assert themselves in the global economy. Unsurprisingly, the meltdown of the economies heaviest hit by the Asian Financial Crisis did not fend well for themselves in the years following. With China rapidly growing to dominate American economic hegemony, an argument is to be made that following the aftermath of the ‘97 economic crisis, China’s increased dependence on international manufacturing has opened up possibilities for the stagnating economies in the South-East Pacific region to rebuild after a failure by the global community to assist in the longer-term. Even if this creates a regional dependency on continued Chinese economic growth to fuel domestic production.


A look back into the years before the Asian Financial Crisis and what is seen can only be explained as sustained, positive economic development. Foreign Direct Investment was at an all-time high (the Thai capital - Bangkok - quickly evolving into a gateway of investment and trade in the region), foreign investment in the region rapidly increased due to governments’ policy-incentives to increase the amount of incoming FDI. These points were undoubtedly a bid by each government to continue the wave of prospective economic prosperity in the coming years. In a way, the economies of the five “contagion” countries (Thailand, Malaysia, Indonesia, the Philippines and South Korea) became evermore economically entangled by following similar processes of economic incentivizing - strategies that are usually hailed in what could be called “geo-politics 101.” As Michael R. King highlights that on the domestic level, local banks and financial institutions were incentivized to borrow foreign short-term, unhedged funds on the belief that investments would carry guarantees from the government. At the international level, foreign investors freely lent to Asian investors under the pretense that, should a crisis from such investments occur (as in 1994 in Mexico), international aid would step in (2001, pp.441-445). From both perspectives, what was seen as “guaranteed” and “safe” investments were rather misguided by uncertain facts and beliefs which were in the grander scheme unfounded.


However, as the saying “all good things must come to an end” entails, the house of cards - that is the now entangled economies - all came crashing down almost overnight when Thailand made the decision to drop the peg of the Thai Baht to the U.S dollar. By October, the four other contagion countries followed suit, letting their currencies float in the face of rapidly departing investments and deteriorating economic conditions for FDI. In the face of these events, GDP growth in these countries stalled with effects lasting deep into 1998:


  • Indonesia 4.7% in 1997 to -13.1% in 1998

  • The Philippines: 5.2% in 1997 to -0.5% in 1998

  • Malaysia: 7.3% in 1997 to -7.4% in 1998

  • South Korea: 6.2% in 1997 to -5.1% in 1998

(Investopedia, 2022)


In response to the meltdown of their national economies, governments (in typical fashion at the time) requested economic assistance from the IMF and World Bank, amongst other aid-sources, in order to soften the damage. It is estimated that a package of roughly $118 billion dollars in economic aid reached Thailand, Indonesia and South Korea in an attempt to bailout the failing economies. In response, IMF-required policies were implemented in each economy - requiring the strengthening of financial systems, decreasing national debt levels, increasing interest rates, and subsequent cuts in government spending (Investopedia). Many of these policy changes highlighted the dangers of the role of currency trading and national account mismanagement in highly interwoven, globalized economies.


More than twenty years later, these countries seem to be stuck somewhere between the “middle-income trap” and an economic gray-area above or below the threshold. With the exception of South Korea - which has since the 80’s-90’s a rather diversified economy - many of the most heavily affected economies have resolved to export specialization. Based on data from between 2018-202, Indonesia, with vast natural resources, focuses largely on the lucrative export of Palm Oil ($17,9B), Coal Briquettes (15,6B), Gold ($6,31B), Petroleum Gas ($5,71B) and Ferroalloys ($4,74B). $32.6B worth of commodities are exported to China (OEC). In essence, the Indonesian economy following the Asian Financial Crisis is largely commodity export dependent, which could have larger ramifications regarding the country’s path to experiencing the “resource curse” as it struggles to branch out of commodity trade.


Interestingly, the rest of the affected economies show trends of following in the economic footpath of China, that indicate a growing focus on the technological sector (in the form of smaller parts required for machinery, devices, etc.), as well as a move away from commodity trading and into trade specialization. Looking at export trends of the five economies, whilst Malaysia shares similar traits with Indonesia in regards to an emphasis on commodity exports, the Philippines, Thailand, and Korea follow more strictly towards China’s path of economic development by focusing on export of higher-grade products. In recent years, there seems to be a focus on Integrated Circuits as the top exports of Malaysia ($65B), South Korea ($82,1B) and the Philippines ($22,6B). Rather unsurprisingly, China is the largest importer of these Integrated Circuits - whilst different sources vary in the value of imports, Chinese imports of Integrated Circuits in 2020 varied between $144B (OEC) and $305,6B (statista). South Korea and Malaysia were the 2nd and 5th largest exporters of Integrated Circuits to China ($37,5B and $10,4B respectively). This sets up the Integrated Circuits exporting economies into a position which, by gaining greatly from the trade, inhibits the possibility of economic independence without Chinese importers fulfilling a majority import-share.


Lastly, Thailand follows China’s economic development in terms of the production of Machinery as the economy’s largest export, which in 2018 had an estimated export value of $55,1B worth of Machinery to the international market, making up 1.58% of global Machinery export. Chinese-Thai Machine trading totalled to around $2,09B worth of Office Machine Parts exported to China out of $30,2B of total Thai products exported to Chinese importers (OEC). When accounting for China’s continued global influence on the tech-industry, a huge discussion point ought to be whether the continued importing of Integrated Circuits create two forms of economic dependency between Chinese-Philippine/South Korean/Malaysian economies: (1) Exports of Integrated Circuits fuel Chinese economic development in the tech-sector (which are set to continue growing exponentially), possibly incentivizing the diversification of mainly the Philippine and Malaysian economies, and (2) by following the Chinese path of economic development, the economies have in essence set themselves up for the “middle-class trap.”


Much like how the saying “trying to ride on the back of the tiger” goes, after economic ruin following the Asian Financial Crisis, with little recovery provided by the larger international community, there is much to be argued of how China set both a market-opportunity for affected economies through incentivizing production-specialization, and simultaneously leading these economies towards a path of economic dependency based on the continued growth of the Chinese economic megapower. It should not be said that China is to blame for incentivizing economic dependency. Rather by failing to efficiently aid the economies of Indonesia, Malaysia and the Philippines to avoid the middle-class trap by supporting diversification of their economies (similarly to South Korea), Chinese demand provided a short-term alternative to economic recovery. Can this be seen as economies following the Chinese path as a fool-proof answer to economic recovery that differs from the failed Western game-book? Or is this the path towards the tiger’s den, with economic dangers that lay ahead?


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