The Perils of Gung-ho International
Starting in Thailand in the summer of 1997, the Asian financial crisis swept through Indonesia, Malaysia, and South Korea, turning the region's economic miracle into a debacle. Capital, which had been flowing in, flew out in huge amounts. Where these four economies and the Philippines had attracted inflows of over $65 billion in 1996, the annual outflows during 1997 and 1998 were almost $20 billion, amounting to an annual resource crunch of over $85 billion—a staggering amount indeed! This caused currencies to collapse, stock prices to crash, and economies to go into a tailspin. 1 This was not all. The fear of ruination by contagion sent shock waves worldwide. The Russian ruble went into turmoil in August 1998; the Brazilian real did so in January 1999.
Per capita incomes tumbled to almost one-third their 1996 level in Indonesia, with the other crisis-stricken Asian countries showing declines ranging from a quarter to nearly half of the 1996 levels. The devastation was reminiscent of the Great Crash of 1929, a searing experience that ushered in the New Deal in the United States and led to competitive escalation of tariffs worldwide. Writing about this crisis that had spread ruin within almost a hundred days, I thought of Octavio Paz's famous lines from “Happiness in Herat”:
I met the wind of the hundred days. It covered all the nights with sand, Badgered my forehead, scorched my lids. 2
This crisis, precipitated by panic-fueled outflows of capital, was a product of hasty and imprudent financial liberalization, almost always under foreign pressure, allowing free international flows of short-term capital without adequate attention to the potentially potent downside