Consequences of the East Asian Currency Crisis

The crisis had significant macro-level effects, including sharp reductions in values of currencies, stock markets, and other asset prices of several Asian countries. Many businesses collapsed, and as a consequence, millions of people fell below the poverty line in 1997-1998. Indonesia, South Korea and Thailand were the countries most affected by the crisis.

The economic crisis also led to political upheaval, most notably culminating in the resignations of Suharto in Indonesia and Chavalit Yongchaiyudh in Thailand. There was a general rise in anti-Western sentiment, with George Soros and the International Monetary Fund in particular singled out as targets of criticisms. Heavy US investment in Thailand ended, replaced by mostly European investment, though Japanese investment continued. Islamic and separatist movements intensified in Indonesia as the central authority weakened.

More long-term consequences include reversal of the relative gains made in the boom years just preceding the crisis. For example, the CIA World Factbook reports that the per capita income (measured by purchasing power parity) in Thailand declined from $8,800 to $8,300 between 1997 and 2005; in Indonesia it declined from $4,600 to $3,700; in Malaysia it declined from $11,100 to $10,400. Over the same period, world per capita income rose from $6,500 to $9,300. Indeed, the CIA's analysis suggests the economy of Indonesia was still smaller in 2005 than it had been in 1997 despite a population increase of 30 million, suggesting an impact on that country similar to the Great Depression.

Within East Asia, the bulk of investment and a significant amount of economic weight shifted from Japan and ASEAN to China.

The crisis has been intensively analyzed by economists for its breadth, speed, and dynamism; it affected dozens of countries, had a direct impact on the livelihood of millions, happened within the course of a mere few months, and at each stage of the crisis leading economists, in particular the international institutions, seemed a step behind. Perhaps more interesting to economists is the speed with which it ended, leaving most of the developed economies unharmed. These curiosities have prompted an explosion of literature about financial economics and a litany of explanations why the crisis occurred. A number of criticisms have been leveled against the conduct of the International Monetary Fund in the crisis, including one by former World Bank economist Joseph Stiglitz.

Politically there were some benefits. In several countries, particularly South Korea and Indonesia, there was renewed push for corporate governance. Rampaging inflation weakened the authority of the Suharto regime and lead to its toppling in 1998, accelerating East Timor's independence.

After the Asian crisis, international investors were reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world. The powerful negative shock also sharply reduced the price of oil, which reached a low of $8/barrel towards the end of 1998, causing a financial pinch in OPEC nations and other oil exporters.

Such sharply reduced oil revenue in turn contributed to the Russian financial crisis in 1998. Which in turn caused Long-Term Capital Management in the United States to collapse, after losing $4.6 billion in 4 months. A wider collapse in the financial markets was avoided when Alan Greenspan and the Federal Reserve Bank of New York organized a $3.625 bn bail-out.

Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s.

The crisis in general was part of a global backlash against the Washington Consensus and institutions such as the IMF and World Bank, which simultaneously became unpopular in developed countries following the rise of the anti-globalization movement in 1999. Four major rounds of world trade talks since the crisis, in Seattle, Doha, Cancun, and Hong Kong, have failed to produce a significant agreement as developing countries have become more assertive, and nations are increasingly turning toward regional or bilateral FTAs (Free Trade Agreement) as an alternative to global institutions.

Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asian currency swaps were introduced in the event of another crisis.

However, interestingly enough, such nations as Brazil, Russia, and India as well as most of East Asia began copying the Japanese model of weakening their currencies, restructuring their economies so as to create a current account surplus to build large foreign currency reserves.

This has led to ever increasing funding for US treasury bonds, allowing or aiding housing (2001-2005) and stock asset bubbles (1996-2000) to develop in the United States.