Internal Antecedents to the 1997 Asian Economic Crisis (1999)

While a large body of literature lays the blame of the 1997 Asian economic on external factors, such as Japan's recession and non-stringent international bank credit, the body of literature examining the internal factors is scant. The purpose of this article is to examine the internal antecedents to the Asian by examining the region-specific economic and cultural conditions leading to the crisis. Not only the traditional factors, such as debt and banking problems are examined, but also the less mentioned and equally important cultural antecedents of collectivism, authoritarianism, and power-distance are explored. This article proposes that investors and academics look beyond economic hard data, and examine the values, traits, and customs of a society in order to evaluate the possibility of a financial collapse. INTRODUCTION The Asian economic crisis, which burst to life in July of 1997 when Thailand could not maintain its currency exchange rate, has spread throughout Asia with a profound impact on local and global economies (Roubini, 1999). The hit South Korea, Thailand, Indonesia, Malaysia, and Philippines hardest (hereafter referred to as crisis Asia). Within several months, the entire region saw declining currency values, large layoffs, contracting GDPs, bank closures and consolidations, rising prices of staples, and crashing stock markets. Table I shows the decline in market capitalization between 1997 and 1998. Furthermore, the area experienced an overall rise in lending rates, inflation, debt repayment problems, and cutbacks on megaprojects. Economic hardships spilled over to the political and cultural realms with the ousting of several ruling parties and their leaders, labor protests and demonstrations, and public outcry. Prime Ministers of Korea, Thailand, and Indonesia were forced out of office. What caused the mostly unexpected to occur in the midst of envied growth and prosperity? How could a region go from first to worst so quickly? Asian economic growth policies were highly coordinated with the World Bank, the International Monetary Fund (IMF), and developed nations partly because Asian countries were dependent on economic aid and guidance from them. Despite this high level of coordination, the Asian countries could not prevent a precipitous fall in currency values and their stock markets. Governments, international institutions, financial groups, and private investors did not foresee the upcoming events in Asia because of the way economic growth is assessed in the global market (Zaman, 1998). Some research pointed towards certain cultural factors unique to Asia that created antecedent conditions that led to the economic collapse. This research has prompted reexamining the Asian values concept and the link between capitalism and democracy (Lohr, 1998). Myrdal (1968) states that the Asian economy cannot be described solely in economic terms. Culture has been increasingly cited as the key determinant of economic and political outcomes (Lohr, 1998). Consequently, this article emphasizes cultural factors including collectivism, authoritarianism, and power-distance. Using the 1997 Asian economic as a case study, this article contributes to the body of knowledge by developing a framework which suggests a causal map between region-specific economic and cultural variables and the possibility of financial crisis. HISTORICAL PERSPECTIVE Prior to the 1997 crisis, the newly industrialized countries (NIC) of the Far East including the Asian tigers of Taiwan, Hong Kong. Singapore, South Korea, and the emerging countries of Malaysia and Thailand enjoyed fast growth in GDP and per capita incomes, foreign investment, and exports of manufactured high-- technology products. Much of the financial world inside and outside of Asia hailed their newly industrialized economres as a miracle. Table 2 illustrates how Japan and Far East GDP was expected to equal that of the U. …