The Asian Crisis

The financial crisis that erupted across Southeast Asia during the fall of 1997 has emerged as the biggest challenge ever. Holding the crisis in check required IMF loans to help the shattered economies of Indonesia, Thailand, and South Korea stabilize their currencies. In addition, although they did not request IMF loans, the economies of Japan, Malaysia, Singapore, and the Philippines were also badly hurt by the crisis.

The seeds of this crisis were sown during the previous decade when these countries were experiencing unprecedented economic growth. Although there were and remain important differences between the individual countries, a number of elements were common to most. Exports had long been the engine of economic growth in these countries. From 1990 to 1996, the value of exports from Malaysia had grown by 18 percent annually, Thai exports had grown by 16 percent per year, Singapore's by 15 percent, Hong Kong's by 14 percent, and those of South Korea and Indonesia by 12 percent annually.¹⁹ The nature of these exports had also shifted in recent years from basic materials and products such as textiles to complex and increasingly high-technology products, such as automobiles, semi-conductors, and consumer electronics.

The Investment Boom

The wealth created by export-led growth helped fuel an investment boom in commercial and residential property, industrial assets, and infrastructure. The value of commercial and residential real estate in cities such as Hong Kong and Bangkok started to soar. This fed a building boom the likes of which had never been seen in Asia. Heavy borrowing from banks financed much of this construction. As for industrial assets, the success of Asian exporters encouraged them to make bolder investments in industrial capacity. This was exemplified most clearly by South Korea's giant diversified conglomerates, or chaebol, many of which had ambitions to build a major position in the global automobile and semiconductor industries.

An added factor behind the investment boom in most Southeast Asian economies was the government. In many cases, the governments had embarked on huge infrastructure projects. In Malaysia, for example, a new government administrative center was being constructed in Putrajaya for M$20 billion (US$8 billion at the pre-July 1997 exchange rate), and the government was funding the development of a massive high-technology communications corridor and the huge Bakun dam, which at a cost of M$13.6 billion was to be the most expensive power generation plant in the country.²⁰

Throughout the region, governments also encouraged private businesses to invest in certain sectors of the economy in accordance with "national goals" and "industrialization strategy." In South Korea, long a country where the government played a proactive role in private-sector investments, President Kim Young-Sam urged the chaebol to invest in new factories as a way of boosting economic growth. South Korea enjoyed an investment-led economic boom in the 1994 - 95 period, but at a cost. The chaebol, always reliant on heavy borrowings, built up massive debts that were equivalent, on average, to four times their equity.²¹

In Indonesia, President Suharto had long supported investments in a network of an estimated 300 businesses owned by his family and friends in a system known as "crony capitalism." Many of these businesses were granted lucrative monopolies by the president. For example, Suharto announced in 1995 that he had decided to build a national car and the car would be built by a company owned by one of his sons, Hutomo Mandala Putra, in association with Kia Motors of South Korea. To support the venture, a consortium of Indonesian banks was "ordered" by the government to offer almost $700 million in start-up loans to the company.²²

By the mid-1990s, Southeast Asia was in the grips of an unprecedented investment boom, much of it financed with borrowed money. Between 1990 and 1995, gross domestic investment grew by 16.3 percent annually in Indonesia, 16 percent in Malaysia, 15.3 percent in Thailand, and 7.2 percent in South Korea. By comparison, investment grew by 4.1 percent annually over the same period in the United States and 0.8 percent in all high-income economies.²³And the rate of investment accelerated in 1996. In Malaysia, for example, spending on investment accounted for a remarkable 43 percent of GDP in 1996.²⁴