The Asian Crisis Ten Years After

This July marks the tenth anniversary of East Asia’s financial crisis. In July 1997, the Thai Baht plummeted. Soon after, financial panic spread to Indonesia and Korea, then to Malaysia. In a little more than a year, the Asian financial crisis became a global financial crisis, with the crash of Russia’s ruble and Brazil’s real.

In the midst of a crisis, no one knows how far an economy will drop or for how long. But capitalism, since its beginning, has been marked by crises; each time, the economy recovers, but each crisis carries its own lessons. So ten years after Asia’s crisis, it is natural to ask: what were the lessons, and has the world learned them? Could such a crisis recur? Is another crisis imminent?

Some similarities exist between the situation then and today: before the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries – a six-fold increase in six years. Afterward, capital flows to developing countries stagnated.

Before the crisis, some thought risk premia for developing countries were irrationally low. These observers proved right: the crisis was marked by soaring risk premia. Today, the global surfeit of liquidity has once again resulted in comparably low risk premia and a resurgence of capital flows, despite a broad consensus that the world faces enormous risks (including the risks posed by a return of risk premia to more normal levels.)