Ateneo de Davao University

School of Arts and Sciences

Social Sciences Cluster
International Studies Department

AN ANALYSIS OF THE
1997 ASIAN FINANCIAL CRISIS

Submitted by:
Roy John V. Malaluan
ABIS-AMST 4
IS 421
TTH/ 1:00-2:30pm

1997 ASIAN FINANCIAL CRISIS

The 1997 Asian Financial Crisis is considered as one of the greatest problem in
the world economy since the Great Depression that struck the United States of America
in the 1930s. According to the Economist (2007), the Asian Financial Crisis originated in
the country of Thailand, wherein the countrys central bank had floated their currency,
baht, after failing to protect and stabilize their currency. Since Thailand was starting to
become a booming economy in the Asian region, investors from different countries have
flocked in the country, and most of these are Thailands neighbor countries. Thailand
also borrowed from other countries which has lower interest rates, such as South Korea
and Indonesia, to accommodate the expansion of the countrys economy. Despite the
countrys efforts, Thailands economy collapsed, creating a contagion effect in its
neighboring countries, most especially to the countries that have invested and became
Thailands creditors, such as South Korea and Indonesia.
International Economic Perspective
The Asian Financial Crisis is a highly economic problem by nature. It is said in
the book of Balaam and Veseth (2001) that in international economics, the economists
assume that a limited role of the state in international trade, finance and development
could actually benefit the people everywhere with increased wealth and welfare. In my
own understanding of this problem, I really think in the devaluation and destabilization of
the Thailands currency, the Thai government is partly to be blamed as they should have
exercised enough control on the currency and economic matters of the state. Without
enough efforts of the state, the economy of the country will surely fail as there should be
the need for regulation of the countrys economic and financial activities. Take for
example the Great Depression in the United States. In the Great Depression, the US
government played a very important role in solving the greatest economic problem of
that time. There will always be a need of sufficient government intervention to combat
this kind of problems in the economy. If the United States has not meddled with the
problems in the depression, the country may have suffered more and may not be able
to become the Economic Superpower today. The role of the government was

emphasized, where government spending was increased to save the economy from
further harm. In effect, Keynes proposal of the role of the state in the depression was
effective and the United States became the biggest economic power few years after the
tragic problem.
Another factor that may have played a big part in the exacerbation of the financial
crisis is the globalization of worlds economy.

Thailand was not the only country that

has experienced the worst in this problem. Two great Asian Economies of today were
also able to experience the full blow of this financial crisis and these are Indonesia and
the Republic of Korea (South Korea). Due to the increasing interconnectedness of
worlds economy, the contagion effect, especially when it comes to issues in
economics and finance, could be very possible. The role played by South Korea and
Indonesia in Thailands economy was a product of the interconnectedness of their
economies. These countries have invested a lot in Thailands economy. Meaning, if
Thailands economy will boom or fail, there would always be positive of negative effects
that will happen as a result of their economic activities. According to Cheetham (1998),
significant declines in the currency of these two countries were recorded where the
Indonesian Rupiah valued 2,380 as to US$ 1 fell to 14,450 to US$ 1. In South Korea, on
the other hand, experienced devaluation on its currency from 850 won to 1290 won per
US$1, before and during the Asian Financial Crisis. This proves that the globalization of
the economy and interconnectedness of the economies of these countries to Thailands
have a negative effect to the economy of other countries.
On the other hand, the globalization of the economy has also resulted to the
crippling of trade in some of the Asian countries that were affected by the Asian
Financial Crisis. There was a significant decrease in the trade activities among
countries and most of the big investors have already left so that they could avoid the
potential failure that can really affect their companies due to the contagion effect. In
fact, this crisis does not affect only the economies in the ASEAN region, but also lead to
the cause of other major economic and financial meltdown in some of the distant
countries. One of example of which is the Russian Financial Crisis of 1998 where the
countrys currency had also experienced devaluation due to the Asian Financial Crisis.

In addition to that, their oil economy was also affected which caused the near failure of
the newly established Russian State (The Russian Crisis of 1998, 1998).
In conclusion, because of the Thai governments failure to contain and solve the
crisis in its own premises and the continuing globalization of worlds economy, the Asian
Financial Crisis of 1997 left a mark in most of the countries in Asian region as this had
severely affected their economy. Also, the problem has reached other countries in the
world, which caused fear of the failure of worlds economy during that time. By now, the
people and different economies that were affected by the crisis should have learned
from their mistakes as problems such this would not occur in the near future, for it will
become more critical and dangerous because of the globalization of economies.
International Relations Perspective
The multilateral and bilateral relations of the countries can both be the cause and
the effect of this great phenomenon that have shaken the world in the 1990s. It can be
the cause since the close relations between and among the countries may have led to
their dependence and interconnectedness, meaning that if something bad happens to
one country; it will have a spillover or contagion effect to the others. According to
Goldstein (1998), the Asian Financial Crisis caused spillover and affected other
countries because of the bilateral and multilateral relations among these countries. It
means that the affected countries have already established great ties, politically and
economically. Because of this, failure of one country could result to the failure of the
other, if the other country may have highly relied and depended on the other country.
The Asian Financial Crisis is a good example of the problems of
interconnectedness between and among countries. What had happened in Thailand
had affected, to different extents, other countries especially those who had close
relations or have established close bilateral relations, whether political and economic in
nature. The affected countries have not felt the crisis due to some coincidence. It is
already expected that these countries could be affected by such phenomenon. Even
other countries that have close relations with Thailand, lets say the United States.
When the news of the crisis has become viral, the United States limited their

involvement in the affected countries for the fear of the contagion effect of the
countries.
To put things in a very political perspective, I will use the recent Arab Spring to
further discuss my point that the relations between and among state could be the cause
for the expansion of effects of different crises. Arab Spring started in Tunisia and effects
of this, such as revolutions and demonstrations to topple down the oppressive
governments in the MENA region, became so widespread in a short period of time. This
is due to the close relations among countries belonging in the same region. Because
these countries have become closer, both geographically and politically, the crises have
spread easily and caused the same effect just like what had happened during the Asian
Financial Crisis in 1997.
Close bilateral and multilateral relations should not be seen as a very negative
thing, though it had caused the exacerbations and spillover of different crises in the
world today. I believe that establishing bilateral and multilateral relations to other
countries is now inevitable because of the highly globalized world we are living today.
The role of the state should be emphasized in this issue since some countries during
the crisis had created policies, ways and strategies, which are proven to be successful
for them not to feel the full extent of the crisis that may attack them, especially during
the Asian Financial Crisis of 1997. States should be alert at all times and should impose
precautionary measures and create strategies to avoid a possible contagion effect once
there will be another financial and economic crisis as big as the 1997 Asian Financial
Crisis.

REFERENCES

Cheetham, R. 1998. Asia Crisis. Paper presented at conference, U.S.-ASEAN-Japan

policy Dialogue. School of Advanced International Studies of Johns Hopkins University,
79 June, Washington, D.C.
Cronin, R. (1998, January 28). Asian Financial Crisis: An Analysis of U.S. Foreign
Policy Interests and Options. Retrieved November 18, 2013, from CRS Report for
Congress: http://www.fas.org/man/crs/crs-asia.htm
Goldstein, M. (1998, March). The Asian Financial Crisis. Retrieved November 19, 2013,
from Peterson Institute for International Economics:
http://www.iie.com/publications/pb/print.cfm?ResearchId=80&doc=pub
Policies: Lessons from the Asian Financial Crisis. (n.d.). Retrieved November 18, 2013,
from Economics of Crisis: http://www.economicsofcrisis.com/AFC.html
The Economist. (2007, July 4). Ten years on. Retrieved November 18, 2013, from The
Economist: http://www.economist.com/node/9432495
The Russian Crisis of 1998. (1998). Retrieved November 18, 2013, from
http://www.twnside.org.sg/title/1998-cn.htm: http://www.twnside.org.sg/title/1998-cn.htm