Fast growth rested on foreign money, cheap labour and natural resources. The 1997 crisis showed how fragile it could be.
Growth relied heavily on foreign investment and borrowing. In the 1990s, banks and firms in Thailand and Indonesia borrowed short-term in US dollars to invest in property and shares.
In July 1997 Thailand was forced to float its currency, the baht, which lost much of its value. The crisis spread. Indonesia's economy shrank by about 13 per cent in 1998, and the economies of Thailand and Malaysia also shrank sharply.
Responses differed. Thailand and Indonesia accepted IMF loans with strict conditions. Malaysia rejected IMF help and imposed capital controls in September 1998. Singapore, with strong banks, was hurt less.
Growth also had environmental costs. Forests in Indonesia and Malaysia were cleared for timber and plantations, and fires in 1997 spread a choking haze across the region.
Some economists argued that growth came mainly from adding more workers and capital, not from using them better. Growth of that kind would slow as these inputs ran out.
Yet most economies recovered from 1999, showing that much of the earlier progress had lasted.
- July 1997
- Thailand floats the baht.
- Indonesia
- Economy shrank about 13% in 1998.
- Malaysia
- Capital controls, September 1998.
Worked example: Judging sustainability
Was growth sustainable?
- Fragile: dependence on short-term foreign money.
- Costly: environmental damage.
- Resilient: recovery from 1999.
- Uneven: Singapore less exposed than Indonesia.
Watch out for this
The 1997 crisis proved that Southeast Asian growth had been an illusion.
Living standards had risen greatly, and most economies recovered from 1999. The crisis showed that growth was fragile, not that it was false.
Check your understanding
How did Malaysia respond differently to the 1997 crisis?
- It rejected IMF help and imposed capital controls.
- It accepted strict IMF loans.
- It nationalised all foreign banks.