By Richard C. Longworth
Who Helped the Asian Economic Crisis
The International Community Intervenes
Foreign governments reacted complacently until the crisis reached South Korea, the world’s 11th largest economy, where only a massive IMF bailout in December 1997 staved off total collapse. The bailout—one of the largest ever arranged by the IMF—was organized because of growing fears that Japan, the world’s second largest economy, might be next.
The IMF oversaw the bailouts of the stricken countries and, as is its custom, tied these bailouts to demands that the countries lower inflation, cut back spending, and in other ways impose a diet of economic austerity. The IMF, in an official report released on January 19, 1999, admitted it misjudged the nature of the Asian crisis and hence prescribed austerity programs that only made the crisis worse. The problem, the IMF concluded, lay not with too much government spending or high inflation, but with over-borrowing and lax oversight by private corporations and banks.
In 1998 the crisis moved from Asia to other emerging markets, so-called because they are all emerging from economies where markets were historically weak or nonexistent, including Communist and undeveloped agrarian economies. Simply because they were new and untested, emerging markets became suspect, first to currency traders and then, as their currencies fell, to other investors. Countries as far removed as Estonia and Venezuela came under attack. But neither suffered as much as Russia and Brazil. In Russia deep corruption and a total lack of commercial law undermined all attempts at market reforms, while Brazil struggled under the burden of heavy public debt. In both Russia and Brazil, global capital markets drove down currencies, increased the economic pain for millions of people, and, in Russia’s case, led to a default on foreign debt that essentially removed Russia as a serious player in the global economy.