Signs are emerging in Southeast Asia that strongly suggest a relapse of the economic crisis that struck the region in 1997.
Three years ago, the Asian economic miracle came to a very public end. Under pressure, Thailand’s currency collapsed and culminated in a general financial panic. Since then, Asian economies have struggled to recover.
Some, like South Korea’s, have done better than others. But in general, most Asian nations have been unable to institute the radical restructuring required for recovery. Some, like Indonesia, have simply lacked the wherewithal for reform. Others, like Japan, lacked the political will to endure the wrenching social costs.
Now, indications are that Asia’s economies are once again running into trouble.
Thailand’s Currency on Downswing
Indeed, Thailand, the first domino to fall in 1997, seems to be leading the way again.
The Thai government was forced to intervene several times in the past three months to stabilize the baht. According to Thailand’s The Nation, the Bank of Thailand intervened in the London market on July 26 in an attempt to strengthen the baht, which had fallen to its lowest level since September 1999.
Thailand is not alone. The Philippine peso, which often closely follows the baht, came within 0.134 pesos of its weakest crisis point of 45.209 to the dollar on July 27. The Indonesian rupiah hit its weakest point since October 1998 and the Singapore dollar fell to its weakest point since September 1998.
But the baht has taken the most disturbing path of regional currencies. The currency experienced a general downtrend since 1998, with intermittent upswings.
This general pattern is seen throughout Southeast Asia. The peso declined more sharply than the baht, and the rupiah has declined steadily since presidential elections in October 1999. In the face of this pattern, stronger countries, like Singapore and South Korea, have been forced to weaken their currencies in order to remain competitive with regional rivals.
Political Instability Is Key Concern
Three key factors are behind these events. First, Asia has not truly recovered from the 1997 crash. Second, the U.S. economy’s continued strength — along with rising U.S. interest rates — has put heavy selling pressure on Asia’s currencies. Finally, political and social instability in Asia is on the rise, decreasing investor confidence.
This last is believed to be the key to understanding the region’s problems. The fragility of the region’s political systems appears to be making meaningful reform impossible.
Consider Thailand. Thailand’s ruling party was badly beaten in the mayoral election in Bangkok on July 23 by Samak Sundaravej, a deputy prime minister during the 1997 financial crisis. Dogged by corruption allegations, Samak supports close cooperation between government and business while opposing press freedoms. He is seen as epitomizing the pre-1997 politician-businessman whose manipulation of the banking system greatly contributed to the Asian financial meltdown.
Nevertheless, he won. He defeated both the ruling party and the new opposition party — both of which advocated economic reform. Faced with the need to change, the public is returning to the politicians who are credited with creating the crisis in the first place.
Dissatisfaction Region-Wide Other regional nations are facing equally difficult political situations, as dissatisfaction mounts over the lack of economic recovery.
Confidence in Indonesia’s president, Abdurrahman Wahid, has steadily declined since his October election, and he faces an August showdown with parliament. In the Philippines, President Joseph Estrada faces continued corruption accusations and has pulled the nation’s few resources into an all-out military campaign against Islamic insurgents. In Malaysia, competition from the Islamic opposition has undermined Prime Minister Mahathir Mahathir’s grip on power.
Economic and political instability in Southeast Asia feed upon each other and threaten to send the region yet again into the depths of economic crisis. If Thailand fails to control the declining baht, the Philippine currency is seen as certain to collapse. Indonesia’s economic weakness also threatens to trigger another currency crisis, and Jakarta has asked its neighbors for assistance.
Thailand’s central bank appears strong enough to delay the inevitable temporarily, but it will certainly drag the Philippines and Indonesia with it. Despite Mahathir’s currency controls, Malaysia, too, would be unlikely to avoid a regional relapse.
International Intervention May Not Help
It is equally unlikely that international intervention will create stability. The International Monetary Fund and the major powers can stabilize currencies briefly. But currency instability is a symptom of the problem, not the problem itself. IMF austerity is viewing as leading to social chaos; while lack of austerity is seen as leading to social malaise.
The real issue is how far north the disease will spread. If Southeast Asia moves into crisis, Japan and China will not be far behind.
Asia and the United States now appear caught in a zero sum game, in which U.S. economic strength costs Asia dearly. And as long as Asia inefficiently maintains social stability, it cannot rebuild its economy. The region’s best hope is that the long-term malaise will be just that — long term — and will not turn into another crisis.