Out of the Ashes? Southeast Asia's Struggle through Crisis
Parker, Stephen, Brookings Review
The Southeast Asian countries of Thailand, Indonesia, Malaysia, the Philippines, Singapore have been at the epicenter of the Asian economic crisis. On July 2 last year Thailand floated its baht after months of trying to defend it against market pressures. The baht sank immediately by about a third, followed with surprising speed by similar devaluations by the Philippines, Malaysia, and Indonesia. Even the Singapore dollar soon fell, though considerably less than the other currencies, and pressure on currency values spread to Northeast Asia, eventually to wreak havoc in South Korea by December.
What started as a seemingly innocuous balance-of-payments problem degenerated into a full-scale economic, political, and social crisis that continues today. The breadth and depth of impact has surprised analysts through each stage of the crisis.
In its wake has come political change, economic recession, unprecedented unemployment, surging inflation, and collapsing imports throughout Southeast Asia. To regain stability and confidence, Thailand's democracy changed government leadership in November and shortly after rewrote the constitution to increase government accountability and transparency. Although the Thai baht has strengthened in recent months, the realization of the extent of the economic downturn becomes more sobering with each government report, the latest predicting a recession with output falling about 6 percent for 1998.
As of this writing, Indonesia stands on the brink of systematic collapse, with the resignation of President Suharto after 32 years of leadership of the New Order Regime and the prospect of declines in output of 20-30 percent. The nation is caught in a vicious cycle--with political transition requiring time but with economic collapse adding instability.
The economic fallout on Malaysia, the Philippines, and Singapore has been less severe, largely because of their more limited foreign debt exposure. For these countries, economic growth is expected to decline by at least half, to 0-4 percent. Nevertheless, Malaysian Prime Minister Mahathir has agreed to dismantle the long-time core of his political strategy, the New Economic Policy, that provided preferences for Malay nationals relative to ethnic-Chinese nationals. The Philippines, in many ways the least affected country in Southeast Asia, faces concerns about populist President-elect Estrada's commitment to continue the successful economic reforms of the Ramos administration. Even Singapore, the most economically developed Southeast Asian country, with respected market and commercial law institutions, is struggling with lower growth and heavy financial exposure to the Indonesian debacle.
Out of this turmoil, however, one catches glimpses of a rejuvenated Southeast Asia with strengthened political and economic institutions. Although the current unraveling in Indonesia (and a weak Japanese economy) casts a pall of concern over the region, many economic forecasts expect the Southeast Asian economies to bottom out over the next six to nine months and to resume moderate economic growth in 1999. After a damaging period of reticence by governments early in the currency crisis, Thailand, Indonesia, Malaysia, and the Philippines are all now implementing a wide range of economic, regulatory, and legal policy reforms. Rather than reversing course and turning inward by increasing protection and fomenting nationalism, all have reconfirmed their commitment to outward-looking development strategies.
The complex, systematic nature of the crisis has revealed strengths and weaknesses--both economic and political--in Southeast Asia's development process. Each country, of course, is different in many ways, but each faces the challenge of adapting its distinctive domestic political and economic systems to the homogenizing forces of globalization. The rapid spread of the crisis from its core in Southeast Asia to the rest of East Asia and then to world markets emphasizes the worldwide integration of financial markets. …